Message from the Chairman
At American Electric Power, we are positioned for superior long-term financial gains because we carefully manage and measure our financial, environmental and social performance while providing our customers with safe, clean and reliable energy.
Nicholas K. Akins
Chairman, President & Chief Executive Officer
American Electric Power
As our industry’s transformation unfolds, AEP is uniquely poised for success. The foundation of our business is built on the strength and diversity of our regulated companies; our investments in transmission enable the growth of renewable resources while modernizing the power grid; and our history of innovation guides our pursuit of new technology solutions for the future.
We are forging new partnerships to speed innovation and building on established relationships to boldly transform our company. As we adapt our 110-year-old business to become the next-generation energy company, we have many opportunities to engage with policymakers, regulators, stakeholders, customers and investors about how our industry is evolving. Our vision is to deliver an energy future built on diverse energy resources and an interactive power grid that is more reliable and secure, with technologies that enhance access and services for all customers.
Our strategy is to modernize the power grid to support a reliable, clean energy future and modern technologies, with a focus on three key elements: building infrastructure and technology to give customers choice about how they use energy, supporting strong communities with economic development opportunities, and providing investors a long-term opportunity for sustainable shareholder returns. Our employees help us implement this strategy with a disciplined and execution-oriented approach supported by a culture of safety, innovation, agility and continuous improvement.
Signposts of Success
Throughout 2015, we reached several important milestones, positioning our businesses for near-term success and long-term sustainable growth. Our goal was simple: to establish a firm foundation to advance our company financially, operationally, culturally and strategically.
We continued to optimize our regulated businesses to position us for the structural changes occurring in our industry. We also invested in our energy infrastructure to create an operational platform to enable customers to create value for themselves, by interacting with us, while public policies and regulatory models continue to evolve.
We are evolving to become the optimizer and integrator of multiple resources – for customers and with customers. That is why we are embracing and helping to develop a transactional energy grid – one with clear and frequent two-way communications between the power grid and customers. Catalysts for this transformation include abundant, low-cost natural gas, environmental regulations, slowing load growth on our system, and the advancement of new technologies that are changing the capabilities of the power grid.
We began laying the foundation for the energy grid of the future nearly a decade ago with the launch of our gridSMART® initiative. That effort began a journey of technological growth to accommodate a more diverse energy mix, improve energy delivery and use new technologies that benefit customers and enhance the operation of the power grid. gridSMART® gave us the equivalent of a smart phone, but with no apps. Today, we are developing the technology to enable our customers to make choices that improve their service, reduce cost and deepen their relationship with us – beyond the basics of monthly billing and outage restoration.
Financial, Social and Environmental Performance
Strong Financial Health
I am pleased to report that AEP’s financial health is at its strongest in years. Our balance sheet and credit metrics are strong, we have sufficient liquidity, and a proven track record of disciplined spending. In 2015, our operating earnings per share grew by 7.6 percent and our quarterly dividend increased by nearly 6 percent. Our performance was strong: We raised our earnings guidance twice during the year. We also paid quarterly dividends to our investors, a continuous tradition that dates back more than a century. In fact, the first quarterly dividend approved in 2016 marked the company’s 424th consecutive quarterly common stock cash dividend to shareholders of record. AEP has paid a cash dividend on its common stock every quarter since July 1910.
AEP is experiencing a cultural transformation, the foundation of which is based on employee engagement and continuous improvement. Employees continue to identify and implement cost reduction strategies, waste elimination techniques and process improvements that enable us to allocate additional resources to invest in priority areas and grow our bottom line. We are excited about this cultural change, not as a one-time initiative, but as a sustainable, continuous part of our business that will redefine who we are for many years to come.
Our regulated companies are driving overall growth which should continue as we invest capital to modernize the power grid and improve the customer experience. For example, AEP Transmission Holding Company contributed 39 cents per share in 2015, compared with 31 cents in 2014 – a reflection of its accelerated growth. Successful regulatory proceedings and the cost savings achieved through employee-led efforts have contributed as well. Our 2016 outlook solidly supports our projected 4 percent to 6 percent operating earnings growth.
Strong Social Performance – Safety, People, Communities
In 2015, we achieved an important new milestone – four consecutive years without an employee fatality. This was a significant breakthrough, because it had not occurred since at least 1970 when we began to keep comprehensive safety performance data. I am deeply grateful to our employees for demonstrating the mutual care and commitment to each other that made this achievement possible.
Sadly, we were reminded of how lives can be changed forever when safety focus is lost. In 2015, four AEP contractors lost their lives and there were 11 public fatalities resulting from people coming into contact with our electrical equipment. And, in early 2016, a veteran transmission employee lost his life and another employee was seriously injured after their vehicle was struck by a train as they were crossing the tracks. These tragedies profoundly affected every employee at AEP, reminded us of how vigilant we must always be about safety and health, and strengthened our resolve for Zero Harm. We are taking a hard look at these events to identify hazard elimination and risk mitigation strategies. We must, and we will, do better.
Although we face numerous challenges in our quest, we are determined to reach our goal. Our strong safety culture and deep commitment to Zero Harm will guide us. In 2016, we will implement a plan designed to get us to Zero Harm in the future. It includes setting clear expectations, increasing personal accountability, providing additional safety training, and being more rigorous when it comes to measuring our performance.
We know that our success as an organization depends on motivated, engaged employees. Three years ago, we assessed our culture for ways to get employees more engaged to help us reach our business goals. We have many opportunities to grow as an organization, and we have seen meaningful improvement in our culture survey results in the last two years. I am excited by our focus on an open, collaborative work environment that values each individual’s contributions. This environment is evidenced and boosted by our seven employee resource groups and the diversity of our work force.
Our success also depends on the strength and vitality of our communities. In 2015, AEP and the AEP Foundation contributed approximately $13.5 million in charitable donations to 1,800 community organizations. We also helped build stronger communities by providing economic development opportunities to attract jobs, support capital investment and grow local economies. Our Economic & Business Development team worked with state, regional and local economic development partners on 170 projects during the year to attract or retain businesses in our communities that are expected to create more than 22,000 jobs in our communities.
We are also investing in education to ensure that graduates are well-prepared to join the work force of tomorrow. Education opens the door to new opportunities, many of which otherwise would not be possible. Being raised in an area of economic hardship, I understand some of the obstacles faced by many families in our communities today.
I want to make sure that children growing up today in our communities get the kind of support, guidance and resources they deserve. That is why we created Credits CountSM, a dual-enrollment program that is helping to build career pathways for economically disadvantaged students in the fields of science, technology, engineering and mathematics (STEM). We have committed more than $11 million to create this signature program. Our goal is to establish at least one Credits Count program in each of our seven regulated companies’ service territories to help create a new generation of highly skilled talent to meet the needs of our company and our country.
2015 was a landmark year for the environment, as over 190 nations acted globally to reach a historic climate agreement last December, culminating decades of debate and negotiation. AEP has always maintained that climate change is a global issue and global responsibility – no single country or company can carry the burden. The Paris agreement sets the stage for such a global solution.
We constantly discuss our carbon profile and our plans to reduce emissions with investors, policymakers, environmental groups, customers and other stakeholders. We have made significant progress and will continue to reduce our carbon footprint as we diversify our energy resource portfolio. Through 2015, AEP’s carbon emissions have already declined by 39 percent from 2000 levels.
In the United States, the Clean Power Plan – the Environmental Protection Agency’s (EPA) mandate to regulate carbon emissions in the power sector – has been stayed by the U.S. Supreme Court. Regardless of the outcome of legal challenges, the EPA still has authority to regulate carbon. AEP has been preparing for this for a long time. Our integrated resource plans factor carbon pricing as a proxy for regulation and we develop plans that give customers what they value most, regardless of the resource.
Between 2011 and mid-2016, we retired more than 7,200 megawatts (MW) of coal-fueled generating capacity. We are replacing it with transmission, natural gas and renewables, including solar and wind, as well as energy storage.
From 2000 through 2016, we will have invested an estimated $8.5 billion to install environmental controls on our plants which have significantly reduced sulfur dioxide, nitrogen oxide and mercury emissions. In addition, between 2011 and mid-2016, we retired more than 7,200 megawatts (MW) of coal-fueled generating capacity. We are replacing it with transmission, natural gas and renewables, including solar and wind, as well as energy storage. We are also continuing to grow our customer energy efficiency and demand response programs.
Although we are converting some coal plants to natural gas and building our renewable portfolio, we believe fossil fuels continue to be an essential part of a balanced energy mix. As our industry relies more and more on natural gas for power generation, we need to support advancements in the development of technologies that will keep fossil fuels in the mix for the long term. A diverse mix of resources is essential to manage resource and operational risk and to ensure an affordable, resilient and reliable power grid.
In Ohio, we worked with key stakeholders on an important settlement of our expanded Power Purchase Agreement (PPA) case that would have given the state the best mechanism within current law to have a say in the long-term viability of existing resources, ensure stable electricity prices and promote development of new resources within the region. But in April 2016 the Federal Energy Regulatory Commission (FERC) unfortunately intruded into Ohio’s ability to protect its retail customers from market volatility and plan for its generation needs by requiring a federal review of the PPA. Waiting for FERC to complete a federal review of the PPA is not in our best interest. Although we continue to believe the PPA is the best long-term approach for our Ohio customers and the state, we are focused on moving decisively to become a fully regulated utility company. We will continue to pursue this strategy and seek innovative, collaborative solutions to create the kind of clean energy future we all want to see.
Building a Sustainable Future
The energy industry transformation is very much like the game-changing evolution of the telecommunications industry. Where once the phone was plugged into the wall, today it is mobile – connected to digital wireless networks and loaded with apps that make life easier. Unlike that industry, however, there is no substitute for electricity nor can you completely become disconnected from the power grid. The transformation that is underway in our industry is dramatic, disruptive, and is being shaped by customer choice, advanced technology, resource diversity, and unprecedented connectivity. At the heart of this transformation is the power grid that we all rely on, every day.
We are changing our business to accommodate local generation of clean energy, optimize power flows and connect diverse resources to the power grid. By 2034, our current integrated resource plans call for adding approximately 3,400 MW of solar, 6,300 MW of wind and 3,000 MW of natural gas. This includes the 900 MW of solar and wind in the AEP Ohio PPA settlement.
The power grid will change as we integrate new 24/7 energy resources, local generation, and large-scale universal renewables, and merge all of that with technological advances that will drive further efficiency and use of electricity. Our transmission and distribution business strategy is based on targeted capital investments to build infrastructure that enables local generation and provides it in a safe, clean, reliable way for all customers.
Technology and Innovation
As the industry’s transmission pioneer and the nation’s largest transmission owner, AEP is working to create a more flexible and resilient power grid that will support changes in generation and allow all customers to take advantage of new technologies in the most cost-effective way. Our investments in new infrastructure and technology will improve both operational efficiency and the customer experience.
Technology is changing how customers can, and will want to, interact with their energy companies. Smart grid technologies are helping us to improve service quality and reliability while empowering customers to use energy more efficiently. We have installed more than 1.6 million smart meters across our service territory and currently have plans to deploy approximately 900,000 additional meters, pending regulatory approval. In addition to giving customers more control, smart meter data will help us enhance the customer experience and prepare for new products and services that customers want from their power company.
The importance of the customer experience to AEP is why we created a new position of Chief Customer Officer in May 2016. This ensures we remain focused on having the right business models, regulatory structures and focus to effectively anticipate and meet the evolving needs and expectations of our customers.
We are also building an internal team for big data and analytics. In 2015, we initiated a proof of concept project, called the Big Data Olympics, to better understand what we can learn from big data analytics to improve the customer experience. With big data, for example, we can receive advance notice of impending equipment failures, allowing us to take preventive action before service is disrupted. We want a much stronger internal understanding of how we can effectively use big data and we are partnering with others, such as IBM, to help get us there faster.
To develop the next-generation energy company, we need partners who are developing new technologies to increase the utility of the power grid – much like apps have increased the power of smart phones. We have several partnerships with technology leaders to help us innovate new ways to use the power grid so that we can meet the expectations of our customers as well as achieve our business goals.
AEP Transmission’s new and compact line, called BOLD™ (Breakthrough Overhead Line Design), is a preferred design due to its lower profile tower and inherent electrical efficiencies, including greater capacity, lower audible noise and lower electromagnetic fields, that can reduce right-of-way land needs.
Our new BOLD™ transmission line design exemplifies these new grid-based technology applications. The new, patented 345 kilovolt (kV) line design delivers up to 60 percent more power in a smaller right-of-way than conventional designs. BOLD – the next-generation transmission line design – is an ideal solution for updating the more than 125,000 miles of 230-kV and 345-kV lines in the United States, especially in congested urban areas. We are now marketing BOLD globally.
Cost-effective energy storage is another technology advancement we are exploring. In 2015, we invested in Greensmith, a company focused on grid-scale energy storage deployment because we want to be at the forefront of advancing these technologies for our customers. This investment builds on more than a decade of experience with energy storage technologies, including deployment of the first U.S. demonstration of the Na/S (sodium sulfur) battery technology in 2002 at one of our commercial offices in Ohio.
Energy storage technology is important because it can maintain service during times of stress on the grid. It also helps to optimize intermittent renewable energy resources, improve power quality and reduce voltage fluctuations. Energy storage is already cost-effective in certain situations and will become more prevalent over time. AEP is building its first substation protection and control system operated entirely by fiber-optic technology. Fiber, which is relatively new to our industry, is less vulnerable to interruption and interference and allows for faster testing and equipment commissioning, which will enhance reliability. We are collaborating with General Electric to build this fiber optic substation, which will be operational by late 2016.
Like all major infrastructure, the electric grid is subject to cyberattacks, physical attacks and natural disasters. Although there is no single solution to make the power grid completely immune from threats, AEP and the industry have taken several steps to evaluate our systems, reduce the potential of attack and improve our response if an attack occurs. We are doing this, in part, through industry and government partnerships to deploy tools, processes and drills to strengthen our ability to prevent, detect and recover.
In 2015, AEP and several other utilities formed Grid Assurance™, an industry-designed solution to deliver subscribers a cost-effective process of pooling the needs of transmission owners across the United States and providing quick access to critical, long lead-time equipment that can be readily deployed to expedite restoration. Subscribers would have the right to call upon this inventory under an array of qualifying events, such as physical attacks, cyberattacks, earthquakes and severe weather.
The Federal Energy Regulatory Commission granted approval to Grid Assurance in 2016, paving the way for utilities to begin subscribing to the service and establishing a process for recovering costs after a qualifying event occurs. This service complements the Edison Electric Institute’s (EEI) Spare Transformer Equipment Program, which provides companies with transformers of certain voltages after a presidential declaration of a national emergency caused by terrorism.
The Pace of Progress
We are moving in exciting and challenging directions to improve the customer experience, deploy new technologies, and leverage our industry’s expertise in operating the electric system. We have a lot to be proud of and much more opportunity ahead. We are continually challenged as technology advancements and changes to consumer expectations converge with policy and regulatory reforms.
The next transformation in our industry is likely to come in the regulatory arena, where federal and state regulators struggle to keep pace with the rapid innovation that is propelling the industry forward. Today, as customers take advantage of subsidies, self-generate their electricity, engage in energy efficiency activities, expect unique solutions based on their own use and profile, and, in some cases, sell power back to the grid, regulations must evolve to keep pace.
The role of the regulator is not to pick winners and losers; rather, it is entrusted with protecting the public interest and maintaining reliability of the grid. Today, customer empowerment in the digital age means more choices and competition, making the task of regulation more complex.
We do not expect, nor do we seek, a one-size-fits-all solution, but in general, the process needs to be fair to all customers, recognize the value of clean energy to customers (even if it is not the least-cost choice), and protect the reliability and security of the energy grid. And it needs to move faster if we are going to achieve the level of energy and cost savings we know to be possible. We are talking to and working with regulators and policymakers in our states and in Washington, D.C., to help ensure a regulatory transition that meets these goals.
An Exciting Future
At AEP, we are proud to have a role in shaping the future of our business and our industry. We are committed to creating a smarter, more secure grid; developing new products and solutions that enhance the customer experience; and leveraging the ingenuity of our employees to reinvent what the next-generation energy company looks like and how we operate. We’ll do this while staying true to our core commitment to providing the safe, reliable and increasingly clean electricity that is the backbone of our nation’s economy and powers our customers’ daily lives.
As my year-long tenure as chairman of the Edison Electric Institute draws to a close in June, I am grateful for having had the opportunity to lead our industry during this exciting time. We are showing the world that our industry has the expertise to operate the largest machine – the electric power grid – and that we are best qualified to lead the transition to a clean energy future.
Finally, I want to recognize the men and women of AEP. They have the talent, ingenuity, innovative capacity and agility we need to succeed and our values will guide us. Together, we will work hard to shape the future and position AEP to excel as it unfolds. As we do so, we will continue to engage our stakeholders and leverage our experience to boldly transform AEP. I invite you to join us on this exciting journey.
Nicholas K. Akins
Chairman, President & Chief Executive Officer
American Electric Power