Chairman’s Message

Nicholas Akins, Chairman, President & Chief Executive Officer

It’s hard to imagine what our lives would be like without electricity. At American Electric Power, we believe a sustainable future begins with the social and economic benefits of delivering universal access to safe, reliable and cost-effective electricity every day. We are proud to have been entrusted with that responsibility and we work every day to deserve that trust. As we transition to a cleaner energy future, we remain grounded in our commitment to working with our customers and communities to build a brighter, sustainable future together.

We’re committed to creating the energy infrastructure and providing services needed to support vibrant communities. Beyond the sale and delivery of electrons, we are investing in education, helping people find programs and services to ensure a better life, collaborating with local and regional organizations to further support economic and business growth, increasing mobility in underserved neighborhoods, and supporting a host of cultural and community initiatives that are important to our customers. Our investments to create a modern, bi-directional, interconnected grid will build value for our communities in ways that we have yet to fully imagine.

We envision a future where smart systems allow us to power society in more efficient, effective ways and in ways customers expect. And that future is a lot closer than we think.

With electrification comes a responsibility to ensure the security, reliability and resilience of the grid. We are investing billions to replace aging infrastructure, making the system stronger so that when outages occur, we can restore service more quickly. We are also diversifying resources, enabling innovation, advancing technologies to plug into the grid, preparing for a digital future, planning strategically for our future workforce and reducing our environmental footprint along the way. In today’s era of continuous disruption and change, energy is the common thread that bridges the past with the future.

Recognizing Our People

2017 was a momentous year during which our employees helped us develop new and creative thinking models, practices and innovations. Through their ingenuity, commitment to safety, continuous improvement and dedication to our customers, our path to a brighter future is clearer than ever. Our success is determined not simply by our physical assets, but by the engagement, generous spirit and talent of our people. Together, we’re putting our energy to work to power a brighter, boundless future.

In 2017, the nation’s electric grid took a thrashing from severe weather. AEP’s system was no exception. Despite the damage and destruction left behind, the human spirit of generosity and mutual care prevailed. I am immensely proud of our line crews and support staff that traveled to restore power under difficult conditions; of those who stayed behind to keep the power on at home; and of our many employees who generously donated cash and volunteered time to help storm victims.

Restoring service proved to be a humanitarian mission of the highest magnitude in 2017, and our employees rose to the challenge every time. We owe them, and their families, a debt of gratitude for putting our customers and those in need first. Throughout these crises, the compassion shown to those in need, and the commitment to customers, reflect who we are – always doing the right thing for our customers, each other and our future.

Nick Akins personally thanks AEP line crews for their hard work and dedication while safely restoring power during Hurricane Harvey restoration efforts.

In Texas, our systems were severely damaged when Hurricane Harvey came ashore. The Category 4 hurricane knocked out power to approximately 220,000 of our Gulf Coast customers at its peak and caused upwards of $325 million in damage. Transmission and distribution crews and support staff from AEP’s six other operating companies converged in south Texas, along with thousands more from utilities around the country, to help us restore service. Our employees also opened their hearts and wallets, donating more than $93,000 to AEP’s Emergency Disaster Relief Fund for relief efforts in hurricane-ravaged portions of the AEP Texas service territory. With an additional dollar-for-dollar match from the AEP Foundation, donations exceeded $186,000 for Hurricane Harvey relief.

Harvey was followed by hurricanes Irma, and Maria, which left Puerto Rico’s power grid in shambles. Millions faced the stark hardship of living without electricity. As soon as the island was able to accept aid, our employees and contractors began rotating in and out of Puerto Rico, working long hours every day, helping to restore power.

Zero Harm – Because We Care

Nothing is more important to me, and to every AEP employee, than safety and health. Our goal of Zero Harm means that everyone goes home in the same or better condition than when they came to work. Two years into a five-year safety and health transformation, we are making progress toward Zero Harm. We are modifying our approach to safety and building a culture that supports and sustains world-class safety performance. This journey requires constant focus, communication, learning and continuous improvement. There is no magic solution; we must steadfastly remain vigilant day and night to ensure our personal safety and the safety of those around us, at work and at home.

Two years into a five-year safety and health transformation, we are making progress toward our goal of achieving Zero Harm.

Despite our efforts, two contractors working on behalf of AEP in 2017 were fatally injured when they came into contact with electrical facilities. These tragedies are unacceptable to me and to our company, and remind us that we have to work harder to strengthen our contractor safety program. We expect the same commitment to Zero Harm from our contractors, not just our own employees. This is especially important as our contractor workforce grows with our business and they are working side-by-side with our employees.

In 2017, there were also tragic consequences when members of the public came into contact with our facilities, causing five fatalities in our service territory. We have reinvigorated our public safety focus, implementing new programs and outreach efforts.

While many numbers we measure are lagging indicators of safety performance, we are focusing on leading actions to prevent harm and to eliminate risks before an injury or illness occurs. Our Good Catch program identifies safety risks before they result in harm, providing us with an opportunity to take corrective action. In 2017, we recorded more than 4,000 Good Catches that we shared across our business units. We have also instituted a new safety and health committee structure that engages employees and removes roadblocks to allow timely corrective actions.

Driving is a critical task for many employees, who in aggregate, average more than 91 million miles a year for work. In 2017, we implemented two important new driving-related safety policies. The Attentive Driving Policy prohibits employees from using cellphones and hands-free devices while driving for company business. We also reinforced the importance of seat belt use in saving lives. Both policies came from employee recommendations during a company-wide driving summit, which was held in response to the deaths of two employees in 2016 from motor vehicle-related accidents.

Our unwavering commitment to Zero Harm is critical because our actions on the job don’t just affect our co-workers; they have a ripple effect on everyone in our lives. I am confident we can achieve Zero Harm. Work groups across the company achieve it all the time, and we must learn what makes it possible for everyone, not just some. We owe it to ourselves, our families and the employees and contractors we’ve lost to be aware and take action. We are making progress but still have much work to do before we can achieve our goal of Zero Harm.

Putting Customers First

We deeply value the relationships we have with our customers and communities. As fast as technology changes and the demand for flexibility of the power grid grows, our customers’ expectations are also evolving. We want to collaborate with them to deliver energy solutions and provide service that goes beyond their expectations. Today, we’re taking steps to ensure every customer has a great experience whenever, and however, they interact with AEP.

In 2017, we achieved two major customer-first milestones: We launched a mobile app to make it easier for customers to do business with us and we redesigned the customer bill to make it simpler and easier to understand. Both projects are examples of how we are responding to our customers’ priorities. We’re working even harder to improve customer satisfaction by putting the customer first in everything we do.

In 2018, we are building a new, state-of-the-art Social Media Center to enhance and expand our ability to listen to and engage with customers and key stakeholders. Customers want to use digital channels to access information or buy services. We will pilot a new energy usage program via a digital platform. We are providing additional training to our customer operations representatives so they can provide an exceptional experience to every customer, every time.

We are working together with customers, policymakers and regulators to drive policies and reforms that enable us to serve customers in ways they expect and deserve. It is encouraging that some regulatory agencies are being proactive in establishing formal proceedings to explore the opportunities of new technologies and determine whether the current regulatory paradigm supports these changes. But many agencies are still standing on the sidelines with the belief that these changes will occur naturally. We believe that regulators must ensure that these new technologies are provided to all.

AEP is at the forefront of developing a truly sustainable, inclusive energy future that recognizes the unique needs of all customers and leaves no one behind. We will continue to advance new and innovative energy solutions, working with our customers, regulators and legislators to make the changes to support a modern and resilient grid.

Working with Our Regulators

If approved, AEP's proposed Wind Catcher Energy Connection project will be the largest wind farm in the United States delivering energy to more than 1 million customers in four states.

2017 saw one of the busiest regulatory calendars in the history of the company. We had rate cases in various stages across five states, and made numerous filings at the Federal Energy Regulatory Commission (FERC), as did our stakeholders. The largest was the $4.5 billion Wind Catcher Energy Connection project, which required filings across four states and at FERC. And, there were numerous filings to support the expansion of renewable energy, energy efficiency, economic development and grid modernization.

Our regulatory case load reflects AEP’s commitment to pursuing solutions that enhance the customer experience and embrace technologies that will improve our overall use of energy. To do so, we must remain financially strong to make the needed investments and to remain attractive to investors. Second, our caseload clearly reflects AEP’s commitment to pursuing solutions that enhance the customer experience and embrace technologies that will improve our overall use of energy. In addition, we should expect to see more capital deployed for projects such as Wind Catcher and other grid optimization technologies that actually lower customer bills for our product.

Preparing the Workforce of the Future

We are looking strategically at our workforce needs to support our business in the future. AEP has long been a leading engineering company; in the future, we will need to complement this expertise with more creative, entrepreneurial and data-driven skills to help us harmonize what our customers are asking for and the solutions and services we will provide.

In the next five years, we are expecting a significant turnover of talent as people retire or leave for other opportunities and we are planning accordingly. Our early work in data analytics is a good example of a new skill set we will need to deliver on our customer experience promise and continue to offer cost-effective energy solutions and services. We are helping our employees to learn and obtain the skills and experience they need to support a 21st century utility. We are also studying how innovations like automation can make work faster, easier and more effective.

We also need a diverse workforce and an environment that fully embraces inclusion. In 2017, we formed a Diversity & Inclusion Council to guide and create strategies for increasing diversity in our workforce, including at the leadership level. The Council will also ensure that diversity and inclusion are integrated in our policies, processes and practices, so that our workforce mirrors the diversity of our communities.

We are making progress but we have much more work ahead. And in the midst of current events, we have reaffirmed and reinforced our expectations concerning harassment of any kind in the workplace. Our Board of Directors also is focused on all of these workplace-related initiatives and the overall culture expectations for the company.

We want a more engaged workforce. Highly motivated and engaged employees are more productive, more likely to innovate, go above and beyond for customers, work safely, and commit to our mutual success. We continue to ensure that our culture promotes total employee engagement. Our annual employee culture survey helps us measure our success and we continue to seek new ways to ensure that we are promoting strategic participation from all areas of the company.

Finally, we expect our employees to act with integrity, to adhere to the highest ethical standards, and to treat each other with respect.

Creating a Clean, Secure Energy Future

Our customers expect safe, reliable and affordable power on demand. More and more of them want their energy to come from cleaner sources. Over the past five years, AEP has moved toward fuel sources with a lower carbon footprint, such as natural gas, wind and solar. In 2005, 70 percent of our generating capacity was from coal; today, it is 47 percent.

By 2030, our integrated resource plans call for us to add approximately 8,000 MW of additional new renewables to our regulated portfolio.

Our integrated resource plans that support the capacity and energy needs of our regulated utilities demonstrate this shift. While these plans will evolve, our goal is to add approximately 8,000 megawatts (MW) of additional new renewables to our regulated portfolio by 2030.

Investing in a clean energy future is good for society and good for our business. Our proposed Wind Catcher project in Oklahoma is an example of our commitment. We are hopeful regulators will support the economic, environmental and social benefits that Wind Catcher will bring to more than one million customers in Oklahoma, Arkansas, Louisiana and Texas. If approved, it will be the largest wind farm in the country with a dedicated generation tie line that will deliver 2,000 MW of clean energy, reduce our fuel costs, save our customers money, further diversify our energy supply, and boost the local and regional economy.

In February 2018, AEP made important and significant commitments to reduce CO2 emissions from our generating facilities. We set new goals to reduce CO2 emissions by 60 percent by 2030 and 80 percent by 2050 (both from a 2000 baseline). These goals emerged from more than two years of engagement with various stakeholders, including our investors. Universally, they asked if we were sufficiently prepared to make the transition to a clean energy future. AEP’s Clean Energy Future report provides details about our strategy, how we manage carbon-related risk, the impact to our customers and potential scenarios that could slow or accelerate these reductions. These ambitious goals will challenge and stretch us, but these dramatic reductions are the right thing to do and I’m confident we will achieve them.

Cyber and physical security attacks are among the biggest threats to the electric grid today. The electric power industry is the only critical infrastructure sector with mandatory and enforceable cyber and physical security standards. It’s not only the grid we have to protect; we must also protect AEP’s business systems.

Protecting the nation’s grid from constant cyber and physical security threats is a responsibility we take very seriously. Today’s reality is that we cannot protect all assets from all threats. Instead, we take a risk-based approach that includes rigorous, mandatory and enforceable reliability regulations; we operate in close coordination within the industry and with government partners. We work continually to strengthen our efforts to prepare, respond and recover should an event occur.

We also learn from real-world events such as the 2015 attack on the power grid in Ukraine, multiple companies affected by data breaches and other cyber-attacks. Regulations are becoming more stringent, and more aspects of the energy system are assigned a critical infrastructure status. As we work continuously to strengthen our defensive posture, we are reinforcing offensive tools that focus on grid resilience and our ability to respond to an attack. This includes protecting the data that we collect.

Presenting New Sustainability Goals

This year, we are introducing new sustainability goals for the future. After conducting extensive benchmarking and identifying opportunities to link sustainability with our business strategy, we engaged employees to help us develop goals. Seven teams of more than 30 people in total participated in establishing three focus areas – energy and environment, social responsibility and economic impact. The goals are aligned with our corporate strategy and business initiatives, and we will report our progress annually. In addition, we are mapping our sustainability goals to the United Nations Sustainable Development Goals because we see a linkage there as well. We are excited to share these goals with you.

Smart Electrification for Social Good

Electrification – the process of powering equipment or systems by electricity – is driving innovation of commercial and residential buildings, transportation systems and industry. It is also driving innovation in the design of new energy solutions and services for our customers.

We envision a future of widespread electrification. By replacing technologies that run on combustion engines and motors with alternatives that run on electricity, we can optimize how we use the power grid and hasten the transition to clean energy. The journey is already well underway; the electricity we produce today already is much cleaner than it was a decade ago. That means every electrical device plugged into our system is using cleaner electricity with less environmental impact.

The advent of smart cities and their ecosystems of smart transportation, smart street lighting, smart buildings, electric vehicle charging stations and other technologies, has quantifiable social benefits for our communities. We are a proud partner with Smart Columbus, where we are leveraging technology in new and innovative ways to enhance public safety and improve mobility in the community.

We are investing approximately $175 million in smart enhancements to Ohio’s energy infrastructure, including deployment of electric vehicle charging stations. By enhancing the transportation system, we are creating equitable access to transportation, which allows greater access to jobs, healthcare and other human services that are needed in underserved urban neighborhoods. We believe smart technology will make our communities more sustainable, resilient, efficient, livable and competitive. This emphasis on smart and sustainable communities will be our hallmark throughout our service territory.

In addition, we will create microgrid demonstration projects with nonprofit entities such as police and fire stations, medical and municipal facilities and emergency shelters. Microgrids provide resilience for the community because they operate independently from the power grid and can be called upon in times of need. By focusing on facilities that provide vital human services, such as public safety and medical care, we can optimize the grid by directing connections that provide social good.

Leveraging Innovation and Going Digital

The world is in the midst of a “connectivity revolution” that will influence how we do business in the future. To keep pace, we are changing the way we organize, behave and operate to remain competitive, better serve our customers and create sustainable value. We are adopting an agile operating model that will allow us to identify risks and opportunities with speed and precision, and to find and repeat solutions rapidly. Our five-year roadmap includes creating the position of Chief Digital Officer to help us chart the way forward.

Building a successful digital future also requires collaboration and innovation. AEP has a rich history of innovation, most of which was centered on the physical assets of our generation, transmission and distribution network. And while innovation to reimagine those systems remains critical, we also are focusing on innovation that more directly benefits the customer. Instead of just thinking about assets and resources, such as generation, transmission and distribution, today’s technology realities extend to grid optimization through big data analytics and customer usage aggregation that helps to drive optimization and efficiency.

In 2017, to spark customer-focused innovation, we launched several initiatives, including partnering with Singularity University, a Silicon Valley think tank helping us to build breakthrough solutions. We held our first “Spark Tank” innovation challenge, encouraging employees to bring forth ideas for services and energy solutions that customers might want. Not surprisingly, our employees embraced this opportunity bringing forward nearly 400 ideas.

In March 2018, AEP became the only North American electric utility invited to join Free Electrons, the first global innovation accelerator that connects promising energy startup companies with leading utilities. I am proud of our employees who continually rise to the challenge of creating new and innovative solutions for customers.

Analytics to Drive Performance

We collect vast amounts of data that provide us with important information, from customer usage patterns to maintenance needs on the system. We continually expand our use of data and analytics to help solve problems and drive better decision-making and actions. Through our Data Science Team, we’re using “big data,” analysis tools, statistics and mathematics to equip us to harvest data more effectively to identify trends and help us become more efficient and resilient.

In 2017, we appointed a Chief Data Scientist to lead our efforts because advanced analytics are so important to our future. Our focus on data-driven, information-enabled decision making gives us an advantage in using analytics to better serve our customers and improve business performance. Big data opens the door to allow us to maximize all of our resources and assets to optimize the grid and deliver on our customer promise. We also take appropriate steps to protect the privacy of all the data we collect.

Leaders Lost

In 2018, we lost two long-time AEP leaders, both of whom made significant contributions to our company and to their communities. Retired AEP board member and Roanoke, Virginia business leader, Donald G. Smith, passed away in March. He was a longtime employee and executive of Roanoke Electric Steel Corporation, one of Appalachian Power’s largest industrial customers. He served on AEP’s board for more than a dozen years. In 2017, the AEP Foundation contributed $250,000 toward the construction of the Don and Barbara Smith Children’s Museum in Roanoke.

Also in March, John E. Dolan, retired vice chairman of Engineering and Construction for AEP, passed away. Dolan was a World War II veteran, having completed 24 combat missions in the European Theater with the Eighth Air Force. He was awarded multiple air medals for his service. He joined AEP in 1950 as an engineer and had a distinguished career with the company until his retirement in 1988. The John E. Dolan Engineering Laboratory in Groveport, Ohio, bears his name. The lab celebrated 30 years of operation in 2017.

Working for a Brighter Future

We are excited about the future and the promise it holds for our customers, employees and shareholders. We know it will look nothing like our past. The disruptive changes to our business are not unique to our company or even our industry. But we are embracing change because our future success demands it. Change creates new opportunities, transforms companies and ignites growth. All are either happening now or are at our doorstep.

Fundamental to our agility and ability to adapt to the seismic changes we face is to reimagine what a leading energy company of the future looks like. And that’s why we’re coming together with our customers and our communities to help define and shape it so we can all be successful.

The spirit of innovation and ingenuity at AEP is stronger than ever. Our new Innovation Hub is a leading example of sharing knowledge, learning together in a relentless pursuit of making what seems impossible, probable -- settling for nothing less than excellence.

Our attention to nurturing an engaged, open, collaborative and inclusive culture is foundational to achieving our goals. We are making good progress every year. We want a diverse workforce and an environment where everyone looks forward to coming to work every day and can contribute in every way possible. We will be relentless in our pursuit of Zero Harm because we truly care about each other. And we will always keep our customers at the center of every decision we make and action we take.

We have laid a strong foundation for the future. We will continue to advocate for our customers, strengthen our relationship with them and deliver on our promise of an exceptional customer experience. We will not relent in our responsibility to provide universal access to the grid because that is how we contribute to improving quality of life for everyone.

AEP will be the model of what society should look like in the future. Much like an orchestra makes music by listening to each other and working together, we know that achieving harmony as we execute our strategy for the future requires constant coordination of diverse interests. I am confident that the men and women of AEP are up to the challenge and we will put boundless energy to work every day to build a brighter future for us all.

Sincerely,

Nicholas K. Akins
Chairman, President & Chief Executive Officer
American Electric Power