Notice of 2001 Annual Meeting Proxy Statement
March 9, 2001
This years annual meeting of shareholders will be held at the Bayfront Plaza Convention Center, 1901 North Shoreline Boulevard, Corpus Christi, Texas, on Wednesday, April 25, 2001 at 9:30 a.m.
Your Board of Directors and I cordially invite you to attend.
E. Linn Draper, Jr.
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 follow the prompts when you vote if you are voting by telephone or Internet. 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 6 which will enable you to gain admittance to the meeting.
NOTICE OF 2001 ANNUAL MEETING
Electric Power Company, Inc.
March 9, 2001
Proxy and Voting Information
This proxy statement and the accompanying proxy card are to be mailed to shareholders, commencing on or about March 13, 2001, 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 25, 2001 in Corpus Christi, Texas.
Who Can Vote. Only the holders of shares of Common Stock at the close of business on March 6, 2001 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 322,083,001 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. 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 6, 2001. 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, the 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.
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 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. 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 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, if the recipient agrees. 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. You may so indicate in the space provided on the proxy card or follow the prompts when you vote if you are a shareholder of record voting by telephone or Internet. If you wish to resume receiving separate annual reports or proxy statements at the same address, you may call our transfer agent, EquiServeFirst Chicago Trust Division, 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. To receive a separate copy of the annual report or proxy statement, contact AEP Shareholder Direct at 800-551-1AEP(1237).
1. Election of Directors
Fourteen 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.
On January 24, 2001, the Board of Directors adopted a resolution reducing the number of directors by one, effective on the date of the annual meeting. Dr. Morris Tanenbaum, a director, will be retiring from the Board and not standing for reelection.
The 14 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 2000 annual meeting, except for Messrs. Brooks, Howell, Powell and Shockley and Drs. Carlton and Sandor. These six former Central and South West Corporation directors were named to the Board when the merger with CSW was consummated on June 15, 2000. 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 23.
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.
Dr. Drapers son is a partner in the law firm of Winston & Strawn which AEP retained during 2000 for matters primarily relating to the restart of the Cook Nuclear Plant. Dr. Drapers son has not been involved with any AEP legal matters.
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 2000, the Board held eight regular and seven 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 2000, except for Mr. Howell, 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 Audit Committee oversees, and reports to the Board concerning, the general policies and practices of AEP 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 AEPs independent accountants and reviews possible conflict of interest situations involving directors.
The Board of Directors has adopted a written charter for the Audit Committee and it is attached as Exhibit A to this proxy statement.
The members of the Audit Committee are independent as defined by the rules of the New York Stock Exchange.
The Committee on Directors and Corporate Governance is responsible for:
1. Recommending the size of the Board within the boundaries imposed by the By-Laws.
2. Recommending selection criteria for nominees for election or appointment to the Board.
3. Conducting independent searches for qualified nominees and screening the qualifications of candidates recommended by others.
4. 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.
5. Reviewing and making recommendations to the Board with respect to the compensation of directors and corporate governance.
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 Corporate Public Policy Committee is responsible for examining AEPs policies on major public issues affecting the AEP System, including environmental, work force diversity, 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 such recommendations as it considers appropriate concerning the short and long-term financing plans and programs of AEP and its subsidiaries and the implementation of the same.
The Human Resources Committee is responsible for:
1. Reviewing executive compensation policies and plans and, as appropriate, recommending changes to the Board.
2. Reviewing salaries and other compensation and benefits paid by AEP and its subsidiaries to Board members who are AEP officers or employees of any of its subsidiaries, and for recommending to the Board for approval the amount of salary and other compensation and benefits to be paid or accrued by AEP and/or any of its subsidiaries during the ensuing year to each such person.
3. Reviewing and approving compensation and benefits for the AEP Service Corporation officers who hold the position of Senior Vice President or higher office.
4. Evaluating AEPs hiring, development, promotional and succession planning practices for those management positions described in (2) and (3) above and recommending changes as appropriate.
The Nuclear Oversight Committee is responsible for overseeing and reporting to the Board with respect to the management and operation of AEPs nuclear generation.
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 $25,000 for their services, an additional annual retainer of $3,500 for each Committee that they chair, 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.
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 750 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, 2000 through September 1, 2001, has a premium of $11,500 and AEP expects to renew this coverage. 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 ($440 for 2000).
Central and South West Corporation Programs. Mr. Powell, as a former CSW director, is enrolled in a medical and dental program formerly offered by CSW to its non-employee directors. AEP is continuing this program, pursuant to the terms of the merger with CSW, for those CSW directors who had previously elected to participate. Mr. Powell pays a portion of the cost of his coverage. Upon Mr. Powells termination of service with the Board, he will be eligible to receive retiree medical and dental benefits coverage.
AEP is also continuing a memorial gift program for former CSW directors and executive officers who had been previously participating in this program. The six 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 fund the program. The annual premiums paid by AEP are based on pooled risks and averaged $13,621 per participant for 2000.
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. 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 is provided by Associated Electric & Gas Insurance Services, Energy Insurance Mutual, Clarendon National Insurance Company, CNA, Great American Insurance Company, Royal-Sun Alliance, Zurich American Insurance Company, Zurich UK, and The Federal Insurance Company, effective January 1, 2001 through December 31, 2001, and pays up to an aggregate amount of $275,000,000 on any one claim and in any one policy year. The total annual cost for the nine policies is $1,244,066.
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, The Federal Insurance Company, and Zurich American Insurance Company, was renewed, effective July 1, 2000 through June 30, 2003, for a cost of $355,350. It provides $100,000,000 of aggregate coverage with a $500,000 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 AEP for the year 2001, 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 AEPs affairs. It and predecessor firms have been AEPs auditors since 1911.
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.
Aggregate fees billed to AEP and its consolidated subsidiaries for services rendered by Deloitte & Touche llp and its consulting affiliate for the year ended December 31, 2000, were:
The Audit Committee has considered whether the provision of services other than audit services by Deloitte & Touche llp and its consulting affiliate is compatible with maintaining that firms independence and the Committee believes that this provision of services is compatible with maintaining Deloitte & Touche llps independence.
Vote Required. 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.
Your Board of Directors recommends a vote FOR approval of Deloitte & Touche llp as independent auditors for 2001.
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 (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, 2000, for filing with the Securities and Exchange Commission.
The Board of Directors does not intend to present to the meeting any business other than the election of directors and the approval of auditors.
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 2000, 1999 and 1998 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, 2000.
Summary Compensation Table
Option Grants in 2000
Aggregated Option Exercises in 2000 and Year-End Option Values
Long-Term Incentive Plans Awards In 2000
Each of the awards set forth below establishes performance share unit targets, which represent units equivalent to shares of Common Stock, pursuant to the Companys 2000 Long-Term 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. 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 targets. No payment will be made for performance below the threshold.
Payments of earned awards are deferred in the form of phantom 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.
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 or by the Central and South West Corporation Cash Balance Retirement Plan), including the executive officers of AEP. The Retirement Plan is a noncontributory defined benefit plan.
The Retirement Plan was amended effective January 1, 2001. The amendment provides that the final average pay benefit accrual formula currently in effect terminates on December 31, 2010 and, effective January 1, 2001, a cash balance accrual formula is added to the Retirement Plan. Employees participating in the Retirement Plan on December 31, 2000 accrue retirement benefits under both formulas and employees hired after December 31, 2000 accrue retirement benefits solely under the cash balance formula. Employees accruing benefits under both formulas may choose either the final average pay formula or the cash balance formula for their accrued benefit at the time employment is terminated. 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 Retirement Plan after that time.
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, assuming retirement at age 65 after various periods of service.
Pension Plan Table
The amounts shown in the table are the straight life annuities payable under the Retirement Plan final average pay formula 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 55 and 62. If an employee retires after age 62, there is no reduction in the retirement annuity.
Compensation upon which retirement benefits under the final average pay formula are based, for the executive officers named in the Summary Compensation Table above (except for Mr. Addis), consists 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. In the case of Mr. Addis, compensation upon which his retirement benefits are based consists of salary and annual AEP Energy Services Incentive Compensation Plan awards up to a maximum of 30% of salary.
Under the cash balance formula each employee has an account to which dollar amount credits are allocated annually based on a percentage of the employees compensation. Compensation for the cash balance formula includes annual salary and annual incentive compensation plan awards up to a maximum total compensation of $1,000,000. The applicable percentage is determined by age and years of service with AEP as of December 31 of each year (or as of the employees termination date, if earlier). The following table shows the percentage used to determine dollar amount credits at the age and years of service indicated:
To transition from the final average pay formula to the cash balance formula, the employees account under the cash balance formula was credited with an opening balance using a number of factors.
The estimated annual annuities at age 65 under the cash balance formula payable to the executive officers named in the Summary Compensation Table are:
These amounts are based on the following assumptions:
AEP maintains a supplemental retirement plan which provides for the payment of:
The supplemental retirement plan was amended to provide for supplemental benefits under both the final average pay formula and the cash balance formula. Retirement Plan benefits shown above include all supplemental retirement benefits.
Dr. Draper and Messrs. Addis and Clements have individual agreements with AEP which provide them with supplemental retirement benefits that credit them with years of service in addition to their years of service with AEP as follows: Dr. Draper, 24 years; Mr. Clements, 15 years; and Mr. Addis, 18.5 years. The agreements each provide that these supplemental retirement benefits are reduced by pension entitlements from plans sponsored by prior employers.
As of December 31, 2000, for the executive officers named in the Summary Compensation Table, the number of years of service applicable for retirement benefit calculation purposes under either the final average pay formula or the cash balance formula were as follows: Dr. Draper, 32 years; Mr. Addis, 21.5 years; Mr. Lhota, 35 years; Mr. Clements, 21 years; and Mr. Fayne, 25 years. The years of service for Dr. Draper and Messrs. Addis and Clements include years of service provided by their respective agreements with AEP described in the preceding paragraph.
Six AEP System employees (including Messrs. Lhota and Fayne) 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 2001 of the executive officers named in the Summary Compensation Table, none of them would receive any supplemental benefits.
AEP 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 defer up to 10% annually 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 1986 program.
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 includes Messrs. Addis, Lhota, Clements and Fayne. The severance plan provides for payments and other benefits if, at any time before June 15, 2002 (the second anniversary of the merger consummation date), the officers employment is 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. Under the severance plan, the officer will receive:
AEPs obligation for the payments and benefits under the severance plan is subject to the waiver by the officer of any other severance benefits that may be provided by AEP. In addition, the officer agrees to refrain from the disclosure of confidential information relating to AEP.
Change-in-Control Agreements. AEP has change-in-control agreements with Dr. Draper and Messrs. Addis, Lhota, Clements and Fayne. If there is a "change-in-control" of AEP and the employees employment is terminated by AEP or by the employee for reasons substantially similar to those in the severance plan, these agreements provide for substantially the same payments and benefits as the severance plan with the following additions:
Human Resources Committee Report
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 Companys 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 9.
The Human Resources Committee recognizes that the executive officers are charged with managing a $55 billion, multi-state electric utility with international investments during challenging times and with addressing many difficult and complex issues.
AEPs executive compensation program is designed to maximize shareholder value, to support the implementation of the Companys business strategy and to improve both corporate and personal performance. The Committees compensation policies supporting this program are:
In carrying out its responsibilities, the Committee utilizes a nationally recognized independent compensation consultant to obtain information and provide recommendations relating to changing industry compensation practices and programs.
The Committee also considers managements initiatives in response to the impact of increased competition and other significant changes in the rapid restructuring of the electric utility industry. It is the Committees opinion that, in this constantly changing environment, Dr. Draper and the senior management team continue to develop and implement strategies effectively to position the Company for the future. This includes the Companys development of unregulated business activities, proposals and actions taken in connection with the industrys transition to competition, establishment of an international energy trading organization and the merger with Central and South West Corporation. The success of these efforts and their benefits to the Company cannot be precisely measured in advance, but the Committee is convinced they are vital to the Companys long-term success.
Stock Ownership Guidelines. The Board of Directors, upon the Committees recommendation, underscored the importance of aligning executive and shareholder interests by adopting in December 1994 stock ownership guidelines for senior management participants receiving performance share awards. The Committee and senior management believe that linking a significant portion of an executives current and potential future net worth to the Companys success, as reflected in the stock price and dividends paid, gives the executive a stake similar to that of the Companys 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 officers corporate position with the greatest ownership target for the chief executive officer. The targets for the CEO and the other four officers named in the Summary Compensation Table are 45,000 shares and 15,000 shares, respectively. Each officer is expected to achieve the ownership target within a five-year period. Common Stock equivalents earned through the Senior Officer Annual Incentive Compensation Plan, AEP Energy Services Incentive Compensation Plan and AEP 2000 Long-Term Incentive Compensation Plan, described below, are included in determining compliance with the ownership targets. As of January 1, 2001, Dr. Draper and all of the other officers named in the Summary Compensation Table have met their ownership requirements within the specified time period. See the table on page 23 for actual ownership amounts.
Components of Executive Compensation
Base Salary. When reviewing base salaries, the Committee considers pay practices used by other electric utilities and 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 base salaries to the base salaries of other AEP managers and employees.
For compensation comparison purposes, the Human Resources Committee uses certain comparably sized and complex 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. The size and complexity of AEP places it above the median of its comparative group. However, because our policy is to place more emphasis on incentive compensation, we target executive officer base salaries somewhat below the level of our position in the comparative group. Base salary levels in 2000 for the CEO and next four most highly compensated executive officers of AEP named in the Summary Compensation Table approximated the median of the comparative group consistent with our policy to place more emphasis on incentive compensation. In establishing base salary levels in that range, the Human Resources Committee considers the competitiveness of AEPs entire compensation package.
Base salaries are adjusted, as appropriate, and reviewed 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 all outside directors of the Board. After full discussion, the outside directors then determine Dr. Drapers base salary.
Annual Incentive. The primary purpose of annual incentive compensation is to motivate senior managers to meet and exceed annual objectives which are part of the long term strategic plan in order to maximize shareholder value.
The Senior Officer Annual Incentive Compensation Plan (SOIP) provides a variable, performance-based portion of the executive officers total compensation except in the case of Mr. Addis. Mr. Addis does not participate in the SOIP; however, he does participate in the AEP Energy Services Incentive Compensation Plan and receives a discretionary distribution from the annual bonus pool that is funded as a percentage of pre-tax operating income associated with energy and other trading activities for which Mr. Addis is responsible. Each officers annual incentive compensation is set forth in the Bonus column of the Summary Compensation Table.
SOIP participants are assigned an annual target award expressed as a percentage of their base salary for the period. In January 2000, the Committee established targets as follows: Dr. Draper, 75%; and the other executive officers named in the compensation table (other than Mr. Addis), 55%. Actual awards can vary from 0-200% of the target award based on performance.
SOIP awards are based on the following preestablished performance criteria:
For 2000, AEP performance merited an award of approximately 76%.
To more closely align the financial interests of the executive officers with the Companys shareholders, SOIP and Energy Services Incentive Plan participants may elect to defer their awards, with the deferrals treated as if invested in Common Stock of the Company, although no stock is actually purchased. Dividend equivalents are credited during the deferral period.
Long-Term Incentive. The primary purpose of longer term, equity based, incentive compensation is to motivate senior managers to maximize shareholder value by linking a portion of their compensation directly to shareholder return.
Long-term incentive awards are made under the AEP 2000 Long-Term Incentive Plan. The plan provides a list of measurements and incentives from which the Committee may select those which provide the most effective incentives at any given time as the Company pursues its strategies and plans. In 2000, for the executive officers other than Mr. Addis, AEPs long term incentive compensation program consisted of grants of stock options and performance share units. Prior to 2000, grants of performance share units were made under the Performance Share Incentive Plan.
In September 2000, the Committee granted stock options to executive officers other than Mr. Addis (as described in the table Option Grants in 2000). This initial grant was structured to provide a special incentive to achieve the benefits upon which the merger between AEP and CSW was based. It is not expected that additional options will be awarded to these persons before 2003.
Stock options granted to the executive officers, when combined with base salaries plus annual incentive payments and the value of performance share units that these officers may potentially earn at target, are set by the Committee so that total compensation is intended to fall at the median range paid by AEPs electric utility comparator group for median performance. The number of options granted is based on the Black-Scholes option pricing model.
Mr. Addis was not granted options because he participates in the AEP Energy Services Phantom Equity Plan that, depending on performance, may pay an award in 2002 based on the value of Energy Services determined as a multiple of after-tax operating income.
The Committee has annually established performance share unit targets which are earned based on AEPs subsequent three-year total shareholder returns measured relative to the S&P peer utilities. In January 2000, the Committee established targets as a percentage of then base salaries as follows: Dr. Draper, 75%; the other executive officers named in the Summary Compensation Table (other than Mr. Addis), 55%; and Mr. Addis, 20%. In accordance with Mr. Addis employment agreement, his target was 20% because of his participation in the AEP Energy Services Phantom Equity Plan. The performance share awards which will ultimately be paid to participants for a performance period can range from 0-200% of the target.
AEPs total shareholder return for 1998-2000 ranked twenty-first relative to the S&P peer utilities and, as a result, none of the performance share unit targets originally established for that period (and dividend credits) were earned.
Payments of earned performance share awards are deferred in the form of phantom stock units (equivalent to shares of AEP Common Stock). Such 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 performance share awards in cash and/or Common Stock. When awards are deferred, dividend equivalents are credited as though reinvested in additional phantom stock units. The performance share unit targets and a further description of performance share awards are shown under Long-Term Incentive PlansAwards in 2000.
Tax Policy on Deductibility of Compensation
The Committee has considered the impact of Section 162(m) of the Internal Revenue Code, which provides a limit on the deductibility of compensation in excess of $1,000,000 paid in any year to the Companys chief executive officer or any of its other four executive officers named in the Summary Compensation Table. It is the Committees expectation, when consistent with sound executive compensation principles and the needs of the Company, that compensation would be qualified for deductibility where appropriate.
Award payments under the AEP 2000 Long-Term 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 SOIP and AEP Energy Services Incentive Compensation and Phantom Equity plans are not eligible for the performance-based exemption and the deduction limit does apply to such awards. Since Dr. Draper has deferred his 2000 SOIP award to dates past his retirement from the Company (providing an exemption from the deduction limit), the Committee has not deemed it necessary at this time to qualify compensation paid pursuant to the SOIP for deductibility under Section 162(m). The Committee may decide to do so in the future.
Except for Mr. Addis, no named officer in the Summary Compensation Table had taxable compensation paid in 2000 in excess of the deduction limit and all such compensation was fully deductible. The Committee intends to continue to evaluate the impact of this Code restriction.
The total return performance shown on the graph above is not necessarily indicative of future performance.
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, 2001 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 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.
Share Ownership of Certain Beneficial Owners
Set forth below are the only persons or groups known to AEP as of December 31, 2000, with beneficial ownership of five percent or more of AEP Common Stock.
To be included in AEPs proxy statement and form of proxy for the 2002 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, Ohio 43215 by November 9, 2001.
For any proposal intended to be presented by a shareholder without inclusion in AEPs proxy statement and form of proxy for the 2002 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 8, 2002. 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, 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.
The Audit Committee of the Board of Directors shall be responsible for overseeing and reporting to the Board with respect to the general policies and practices of the Company (and the subsidiaries of the Company included in the consolidated financial statements of the Company) with respect to accounting, financial reporting, internal auditing and financial controls; and for maintaining, by means of regularly scheduled meetings and otherwise, a direct exchange of information between the Board and the Companys internal auditors and independent accountants. The Audit Committees composition shall meet the requirements of the audit committee policy of the New York Stock Exchange.
Without limiting the generality of the preceding paragraph, the Audit Committees duties shall include: (1) reviewing and approving the terms of the engagement of the Companys independent accountants with such accountants, including the scope and general extent of their planned review, the general nature of the audit procedures which will be utilized, any non-audit services performed or planned, and the compensation to be paid to such accountants for all audit and other services; (2) assuring annual receipt of a formal written statement from the independent accountants delineating all relationships between the independent accountants and the Company and discussing any such relationships and impact on their independence and recommending that the Board take appropriate action in response to the independent outside accountants report to satisfy itself of their independence; (3) reviewing with the Companys independent accountants, with the manager of internal audits, with the chief accounting officer of the Company and with other appropriate personnel of the Company and its subsidiaries, the general policies and procedures of the Company with respect to internal auditing, accounting and financial controls, and the adequacy of such policies and procedures; (4) reviewing any reports of material weaknesses in internal controls prepared by the Companys independent accountants or internal auditors, and the action taken by the appropriate personnel of the Company and its subsidiaries in response to any suggestions contained in such reports; (5) reviewing with the Companys independent accountants, with the chief accounting officer of the Company, and with other appropriate personnel of the Company and its subsidiaries any proposed accounting changes which may have significant impact on the Companys financial statements; (6) reviewing with the Companys independent accountants, upon completion of their audit, the annual financial statements of the Company and of the Company and its subsidiaries consolidated, any reports or opinions that such accountants propose to render in connection therewith, and any other matters in connection therewith that the independent accountants or the Committee consider relevant, including the independent accountants qualitative judgments about the appropriateness of the accounting principles used and clarity of the financial disclosure practices; (7) reviewing with the independent accountants the Companys interim financial results to be included in the Companys quarterly reports to be filed with the Securities and Exchange Commission prior to the filing of the Form 10-Q; (8) recommending the appointment or discharge of the independent accountants to the Board of Directors; (9) supervising 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 operations of the AEP System companies, and the designation of successor chief compliance officers; (10) reviewing possible conflict of interest situations involving directors; and (11) directing and supervising special investigations of the affairs of the Company, including the authority to retain independent counsel and other professionals to assist in the investigation.
In the discharge of its duties: (1) the Audit Committee shall hold such meetings as it deems necessary but shall meet a minimum of four times prior to the next annual meeting of the shareholders of the Company; (2) at the request of the Companys independent accountants, chief accounting officer, or manager of internal audits the chair of the Audit Committee shall convene a meeting of the Committee to consider any matter that the person requesting the meeting believes should be brought to the attention of the Committee, the Board of Directors or the shareholders; and (3) the Audit Committee may require any officer or employee of the Company or its subsidiaries to furnish it with any information, documents or reports that it may specify and to appear before it in person.