AEP Sustainability - Strategy

Strategy for the Future

The rapid changes transforming the energy industry, driven by technological innovation and interconnectivity, are altering the dynamics of how people interact with the power grid. These changes are turning consumers into active, not passive, participants. Every interaction our customers have with us is compared to their experiences with companies in other industries, which changes their expectations of AEP and challenges us to redefine the relationship we have with our customers. From decentralized power generation and beneficial electrification to digitization and process automation, disruptive innovation is reshaping our industry and our company.

AEP’s strategy for growth and the way we are advancing our business model are also changing as we plan for a future that is evolving. Historically, our capital investments focused primarily on large, centralized power stations, building new capacity and applying new engineering practices to comply with environmental regulations and extend their life.

Today, our capital investment strategy spans the value chain of generation, transmission and distribution spurring innovation, with the customer at the center. Our focus is on providing customer solutions through technology; diversifying our resources for a cleaner, more balanced portfolio; working with regulators to modernize the regulatory compact to keep pace with the changing needs of all our customers; and preparing for the future of work and the new skills our workforce will need. At the same time, we continue to reduce our environmental footprint, remove risk from our business and deliver value to our customers and shareholders.

Between 2019 and 2023, AEP plans to invest $33 billion in capital, with 75 percent of it targeted for transmission and distribution.

AEP’s transformation is well underway and our track record of consistent, quality earnings and dividends positions us for a bright future. In 2018, AEP’s strong earnings performance was driven by a robust economy, our continued focus on investing in our system to enhance services for our customers, managing our costs and favorable weather throughout much of the year. In 2018, AEP announced plans to increase capital investments in its regulated operations over the next five years to provide more advanced, resilient and cleaner energy solutions for customers. We also committed to investing $2.2 billion in contracted renewables through 2023.

Our projected operating earnings growth of five to seven percent is predicated on our ability to continue efficiently investing capital to modernize the grid. We have thousands of smaller capital projects that are within our control to execute as we replace aging infrastructure and transform the grid to a platform of two-way flows of information and energy. Our fundamentals for growth are strong, giving us options about how we invest today and what we invest in for the future.

Maintaining a strong balance sheet and credit profile is a priority. We regularly monitor a variety of metrics that help us to know when we will need to access the capital markets for funding to support our capital investment program, which, in turn, allows us to grow earnings and provide reliable service to our customers.

We are proud that we have paid a quarterly dividend to our shareholders since 1910. In 2018, AEP delivered a total shareholder return of 5.4 percent, exceeding a 4.2 percent total return for the S&P 500 Electric Utilities Index. In fact, over the past five years, we’ve provided a total shareholder return of more than 92 percent. This outperformed the broader S&P 500 Index total return of 50 percent and 65 percent total return for the S&P 500 Electric Utilities Index.

Managing O&M (operations and maintenance) costs as capital investments increase is part of our culture at AEP. Because we believe that every dollar counts, we are focused on managing costs to optimize our spending on the customer experience and to deliver operational excellence. That includes our transition to a clean energy future and ensuring that every customer has access to the resources and technologies the grid provides.

AEP has laid a strong foundation for growth as we transform our company for operational excellence, financial strength and workforce readiness. This will bring us closer to our customers, delivering reliable and affordable energy; providing innovative and tailored solutions that improve their businesses and their lives; while maintaining universal access to the grid. To achieve this, we need a culture of diversity and inclusion; relentless focus on controlling costs; continuous learning to be the disruptor and adopter of new technologies; and process efficiencies to optimize technology, automation and digitization. We must bring regulators and legislators along with us so we can secure supportive policies that allow us to continue investing in the right assets and resources that improve the customer experience.

Today, AEP is financially strong and well-positioned for the future. As we are investing in our future, we have a lot of options to maximize those investments. Our grid modernization investments are creating the platform to enable expansion of distributed resources, more efficient use of energy, two-way flow of communication and power, and expanded electrification. We are working to expand both our regulated and competitive renewable portfolio to deliver clean energy to customers within and outside of our traditional service territory.

Our investments in transmission are critical to enabling renewable resources to connect to the grid as well as improving local and regional reliability for customers. It also makes economic development possible, which supports our mission of building stronger communities. We are projected to invest about $3 billion per year through 2023 to strengthen and modernize transmission.

We are strategically partnering with start-ups to pilot an array of technologies so that we can be the digital energy company of the future. We want to be ready when new technologies are set to be mass-marketed, which means being an early adopter. There’s risk in this approach – we know some technologies will fail – but it’s fundamental to delivering an excellent customer experience.

To better support our innovation strategy we hired a Chief Digital Officer in 2018 who formed a new team, called Charge, to incubate and develop new ideas, without disrupting day-to-day operations. The teams look for projects that will add value for AEP and quickly discard those that won’t. This means the project must improve the customer or employee experience while creating financial value, such as reducing spend, creating efficiencies or increasing revenue. This team is charged with reimagining our business for the future.

We are also growing our competitive business. AEP Energy Partners has subsidiaries that are serving wholesale markets, retail electric and gas customers across the country and providing tailored energy solutions to large commercial and industrial customers. Our commitment to grow contracted renewables was bolstered in early 2019 with the acquisition of Sempra Renewables LLC. When combined with the completion of the Santa Rita wind farm in San Angelo, Texas this year, AEP’s total renewable capacity will increase to 16 percent from 4 percent in 2005.

Without engaged employees, executing on our strategy would not be successful. To AEP, engagement means including everyone, solving problems and working as a team. That is why we are transforming our culture to foster an environment that welcomes and encourages diversity and inclusion, collaboration, openness and engagement. Our safety culture continues to be a strength and core value for AEP. Learn more about culture at AEP.