AEP Sustainability - Strategy

AEP'S STRATEGY FOR THE FUTURE

At AEP, our path forward is clear and our strategy is unchanged. We are as committed as ever to operational excellence, financial discipline, innovation and technology, and being nimble as we adapt to a changing world. The global COVID-19 pandemic, a once-in-a-lifetime event, dramatically changed our lives, severely impacted the economy and strained our communities. As we pivoted to adapt, the electric power grid became a lifeline for those working from home; students who finished the school year online; and the front-line workers caring for the sick, stocking grocery store shelves, and delivering mail and packages to our homes. Our strategy and the investments we are making to modernize and enhance the resilience, security and efficiency of the grid are essential to serving societal needs and demonstrate the critical nature of the service we provide.

AEP’s record of consistent earnings and dividend growth, a strong balance sheet and our continued focus on our customers and communities is essential to our mission. Before the onset of the pandemic, we had already taken steps to further reduce expenses and we are accelerating those plans as we work with customers hard-hit by the public health crisis to recover and reopen. We remain committed to delivering technology and digital solutions to customers; diversifying our resources to stay the course for a clean energy future; working with regulators to modernize the regulatory compact to keep pace with changing customer needs; and preparing for the future of work through workforce development while building a talent pipeline for the future. At the same time, we continue to reduce our carbon footprint and deliver excellent environmental performance, remove risk from our business and deliver the value that our customers and shareholders expect.

The pandemic underscored the importance of nonfinancial risks that we also must weigh as we execute our strategy. For example, our priority to protect our employees from harm heightened as we pivoted to new ways of doing our work, expanded benefits for our frontline employees who are most at risk, and took measures to reduce the risk of exposure by providing protective equipment, sanitization of facilities and vehicles, and enabled thousands of our employees to work remotely.

Although the pandemic is causing a shift in the timing of $500 million in capital spending from 2020 to future years, our overall strategy for investing $33 billion through 2024 remains unchanged, with 78% dedicated to transmission and distribution projects. Our grid modernization capital investment strategy is important because it is creating the platform to expand distributed resources, enable efficient use of energy, allow two-way flows of power and communication, and support expanding electrification. The pandemic’s profound changes on everyday life and business underscores this. We continue to expand our regulated and competitive renewable portfolios within and outside of our traditional service territory. This will grow further with the pending review and approval of our North Central Wind Facilities in Oklahoma.

Our strategy for a clean energy future is on course. We are building a modern grid that is scalable to support the demand for more electricity from electrification, such as electric vehicles, data centers and other future power needs. We have strategic collaborations with start-ups and other partners to explore and pilot an array of technologies so that we can accelerate our goal of being the digital, clean energy company of the future. The pandemic may have cast a shadow over the economy and recovery may take some time, but we are optimistic about our ability to balance and meet the needs of our customers, investors and communities as we continue to execute our strategy.

Strong Financial Performance in 2019

In 2019, 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, the management of our costs and favorable weather throughout much of the year. AEP plans to continue 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 $2.1 billion in contracted renewables over the next 5 years.

Our projected long-term operating earnings growth of 5% to 7% is predicated on our ability to continue efficiently investing capital to modernize the grid. We have numerous capital projects of varying sizes that are within our control to execute as we cost-effectively 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 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. The pandemic has challenged us but we are well-positioned thanks to the diversity of our service territory and our commitment to financial discipline.

We are proud that we have paid consecutive quarterly dividends to our shareholders since 1910. In 2019, AEP delivered a total shareholder return of 30.5%, exceeding a 27.5% total return for the S&P 500 Electric Utilities Index. In fact, from 2014 through 2019 we have provided a total shareholder return of more than 85%. This outperformed the broader S&P 500 Index total return of 74% and the 60% total return for the S&P 500 Electric Utilities Index.

Because we believe that every dollar counts, our focus remains on managing costs to optimize spending for the greatest impact on the customer experience and to deliver operational excellence. That includes continuing our transition to a clean energy future and ensuring that every customer has access to the resources and technologies the grid provides.

Achieving Excellence

To be a leader, we must constantly check and adjust business practices and performance to maintain momentum. AEP has long been a responsible steward of its costs and expenses to mitigate the impact to customers and to enable more opportunities for growth. However, with the advent of new technologies, growing competition for customers, flat load growth, and a steady decline in population throughout our service territory over the past three decades, we are at an inflection point, and our response will influence our future path. The COVID-19 pandemic is also creating additional challenges we will work through.

In late 2019, we launched Achieving Excellence, a new disciplined cost optimization process, with a focus on O&M reduction and revenue growth, to improve our business. The purpose of the employee-led initiative is to identify and eliminate inefficiencies, adopt improved business practices and processes, and advance the creativity and innovation of the company. This program will constantly focus organizations on cost profile improvement to enhance existing budgeting processes and leverage the skills, knowledge and creativity of our employees to drive down costs. We are employing technology such as automation, digitization and data analytics, exploring outsourcing options, seeking process improvements, and conducting strategic workforce planning.

We received thousands of ideas from employees to improve efficiency, reduce costs and streamline operations. We are also incorporating added insight from operational changes that occurred as a result of the COVID-19 pandemic, such as work from home alternatives.

AEP will continue this process annually to ensure we continue to be focused on meeting financial and stakeholder expectations. Achieving Excellence will be integrated into the way we manage our business through alignment with our Breakthrough Objectives and driving our strategic goals.