AEP Sustainability - Chairman's Message

Dear Friends and Colleagues,

Chairman's Message Brochure

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At AEP, we see a future full of opportunities for our customers, employees, investors, communities and our company. To create this future, we must be increasingly innovative to develop cutting-edge solutions to complex problems. We must be agile and adaptable to leverage rapid, sometimes unpredictable, changes in technology. And we must nurture a diverse, inclusive and engaged workforce that is clearly focused on delivering 21st century customer service as we further electrify our economy.

We’re meeting these inter-connected challenges, by partnering with start-up companies and working in global innovation hubs to incubate and test new, leading-edge technologies and processes. We’re seeking collaborative opportunities to improve our operational efficiency, enhance our ability to collect and analyze data, and deliver a superior customer experience.

Our stakeholders are critical to our success and we have engaged them on numerous issues, especially climate change. For decades, we have listened to diverse viewpoints from customers, investors, the environmental community and others about the potential impacts and magnitude of climate change, and about what we can, and should, do to set and meet ambitious goals in a timely manner. We embraced their aspirations for a clean energy future and together set a realistic path to achieve it.

We are making progress. We have retired approximately 7,800 MW of coal-fueled generation since 2011, increased the size of our renewable portfolio, and helped our customers become more energy efficient. In 2018, we set new carbon reduction goals – 60 percent by 2030 and 80 percent by 2050 (both from a 2000 baseline). At the end of 2018, our carbon emissions were 59 percent lower than in 2000 – exceeding targets set by the U.S. EPA’s Clean Power Plan for the electric sector. Since we are so close to achieving our 2030 goal more than a decade ahead of schedule, we are reevaluating this target. We review these targets annually in the context of where we see regulations, policies and technology advancing and what we believe we can achieve. Our ability to move technology forward will only accelerate what we are able to do.

We’ve invested significantly to modernize the electricity grid, making it more efficient, enabling the growth of distributed energy production, and transforming it into the information and clean energy platform we need to power the future.

We’re building a new talent pipeline and developing our current workforce for a digital future. This is critical as we shift from being a generating resources-driven company to a people, data and technology-driven company. We’re talking to our customers, understanding their needs and seeking new solutions for their benefit. And we are delivering value to our shareholders while having positive impacts on the environment, our communities and society in general. I am confident we are on the right path and excited about our future.

As we grow and invest in a smarter, cleaner energy system, we continuously reward our shareholders. AEP has paid quarterly dividends to our investors since 1910 and we are proud of the consistency and quality of the earnings and dividends we deliver. In 2018, we provided a total shareholder return of 5.4 percent – exceeding the 4.2 percent total return for the S&P 500 Electric Utilities Index. From April 2018 to April 2019, AEP has delivered a total shareholder return of 25.4 percent. In addition to investing capital, we closely manage our costs and expenditures, using the savings to deliver additional benefits to our customers and investors.

As always, I am extremely proud and deeply appreciative of the employees of AEP who are paving the way for our future success. They give generously, work tirelessly and provide the knowledge, experience and creativity that keep us moving ahead. It is a privilege to lead and work beside them. Together, we are creating a clean, bright energy future for us all.

Safety is our most important value – nothing we do is more important than working to prevent harm to our employees, contractors and the public. Our success as an organization is based on working safely to ensure the well-being of all. At the end of each workday, everyone must return to their loved ones in the same condition as when they arrived at work. All of us at AEP are personally committed to Zero Harm, starting with me.

Zero Harm requires hard work, including knowledge, determination, vigilance, patience, and a round- the-clock effort to look out for ourselves and for each other. In an instant, one error, one shortcut, can result in grave consequences.

In 2018, AEP employees and contractors worked 4.3 million more hours than in 2017 to serve our customers. At the same time, our DART rate (Days Away, Restricted or Transfer) improved approximately 11 percent compared to the three-year historical average. This is encouraging and demonstrates significant progress towards Zero Harm. But we must maintain focus and resolve. We must believe that we can reach our goal and be relentless every minute of every day on every job.

Last year, more than 80 percent of all work locations across AEP achieved Zero Harm, which tells us three important things: harm can be eliminated, we are working hard to prove it, and we still have a long way to go.

We know this all too well. I am deeply saddened to report that in 2018 an AEP employee was fatally injured on the job and, in March 2019 another AEP employee lost his life in a job-related accident. Everyone at AEP feels these profound losses, both personally and professionally. One of the best ways we can pay tribute to them and their families is to learn from these events.

We held company-wide Safety Stand Downs to refocus on and reinforce our commitment to Zero Harm. We implemented new life-saving rules; recorded more than 16,000 CORE visits (coaching through observation, recognition and engagement) in 2018 to create meaningful interactions and reinforce positive safety behaviors; and logged more than 5,000 “Good Catches” from employees and contractors who found ways to prevent harm. And, through continuous communications, we share information and best practices and recognize those who excel at achieving Zero Harm. We are also piloting an assessment process to look more closely at our training and skills, and our critical safety measures and protections. I can’t say this enough: our most important goal is to ensure that everyone goes home in the same condition as when they came to work.

We’re also building stronger contractor and public safety programs to ensure that our safety expectations are clear and are being met.

Diversity and inclusion are as important to our success as any strategic or operational action. We require a diverse, inclusive workforce and a culture that values the differences among us. Our success lies in large part with our ability to respect and embrace all people and divergent views that allow us to have a clearer view of obstacles and opportunities. We’re all on the same team, striving for the same bright future, and when we appreciate and value our differences as well as our similarities, that’s when we succeed as an entire company.

Diversity and inclusion are not checklists or slogans. Like safety, they require focused action and changes in how we think and act. Diversity and inclusion improve morale and our ability to work as a team, they enhance our reputation and our brand, they help drive innovation, help to engage the diverse communities we serve, and strengthen us as an organization and as individuals. If we are not diverse and inclusive, we will be left behind.

In 2017 we established a Diversity and Inclusion Council to focus on our workforce, supply chain and community engagement, and in 2018, we appointed a Chief Diversity and Inclusion Officer. Together, they are helping us with this business-critical mission. Our 2025 Diversity and Inclusion Roadmap, which includes accountability metrics and extensive partnering with other committed organizations, will help us attract, develop and retain the strongest talent from an increasingly diverse talent pool, while enhancing the engagement, knowledge and skills of our current employees. We also plan to achieve gender and wage parity and break down barriers caused by unconscious biases. We are committed to holding ourselves accountable for maintaining a supportive culture.

Creating gender parity in leadership roles is critical because of a strong correlation between success and diversity. In collaboration with Paradigm for Parity®, a coalition of business leaders working to address gender inequality, we are making progress toward gender parity at all levels of corporate leadership.

This commitment extends to our Board of Directors. The Board’s Committee on Directors and Corporate Governance has committed to include in each director search qualified candidates who reflect diverse backgrounds, including diversity of gender and race.

The Board regularly considers AEP’s strategy and the skills, experiences and qualifications that should be represented on the Board to effectively oversee the company’s strategic direction. In 2019, we welcomed a new Board member with digital/technology, marketing and IT skills. Her election increases the diversity of our 13-member Board to 31 percent.

We conducted a listening tour and survey in 2018 to determine what employees think about diversity and inclusion at AEP. I am grateful to over 700 employees who participated – opening themselves up to share honest and important personal insights. They expressed a desire to learn more about why diversity is so important to our business and want accountability, education and engagement from leadership.

As a new generation enters the workforce, we want the best and the brightest minds to join AEP. We are working to understand their needs and desires and what the future of work holds for them to ensure that we attract and retain the top talent to lead us forward. Diversity and inclusion are at the heart of that effort, and I am confident we will succeed.

Our customers want and expect more from us today than reliable, on-demand energy. With expectations shaped by their experiences with companies like Netflix, Google and Amazon, they are demanding personalized, on-line information and services delivered instantly, with more choices, convenience and control. We are providing them with easier ways to interact with us because their choices are critical to our future success.

Voice engagement channels will allow customers to access information within their home energy management platform and other AEP digital customer applications.

For example, in 2018 we partnered with Google, Amazon and Tendril (a home energy management technology platform) to pilot a voice activated application on Google Assistant and Amazon’s Alexa. Customers can now ask out loud, “How much is my bill?” or “How can I save energy?” and get immediate answers, day or night. We intend to expand this service across all of our operating companies. We also opened our Social Media Center in 2018, run jointly by our communications and customer services organizations, and available to customers seven days a week.

To track our performance and hold ourselves accountable, we developed a Customer Experience Dashboard that provides us with information on customer satisfaction, ease of doing business with us, and how customers are feeling about the company. We can track “message sentiment” data, determine the percentage of positive, negative and neutral messages about AEP on social media, and work to improve those numbers. As a result, we are engaging customers in ways that meet their specific needs.

We are also working to improve service to large customers who connect directly to our transmission grid. We are testing a system in Oklahoma, for example, that leverages our smart meters to track and report momentary outages, or “blinks,” on the system. These blinks can shut down production lines for large customers where equipment is hyper-sensitive to momentary disruptions. We will soon have the intelligence we need to inform solutions to better serve our larger customers’ needs.

Our 2023 strategy clearly identifies significant opportunities for advancing our vision and our entire company is working to meet our customers’ needs. As our regulated utility companies continue to invest in distribution and transmission to modernize the grid and develop capabilities to meet future customer expectations, we are also looking at new opportunities to serve customers. AEP Energy and its unregulated subsidiaries are well-positioned to offer customer solutions, including renewables, distributed generation and storage, and can deploy them within and beyond our traditional service territory boundaries. This team effort allows us to provide customers with an array of solutions.

In April 2019, we completed the acquisition of Sempra Renewables, LLC, adding 724 MW to our renewable portfolio from seven wind farms and one battery installation in seven states. This acquisition, and completion of the Santa Rita East Wind Project currently under construction in Texas, will boost AEP’s total regulated and contracted renewable portfolio to more than 5,000 MW.

Strong customer interest in renewable energy is also driving multiple efforts to increase our clean energy resources within our regulated utilities. In 2019, Appalachian Power is seeking proposals to add up to 200 MW of solar energy projects in Virginia to reduce customer costs and further diversify its electricity generation mix. Southwestern Electric Power Company and Public Service Company of Oklahoma are both working to add new wind energy resources for their customers, too.

By modernizing the grid and diversifying resources, investing in innovation, piloting new technologies and engaging customers in their channels of choice, we can deliver the excellent service our customers expect.

A clean energy economy requires a combination of resources, innovation and technology. In fact, innovation and technology are fast becoming an integrated resource that drives efficiencies and optimization of the electricity grid, benefitting customers and the environment. Enabling a clean energy future also requires taking a hard look at how the traditional regulated utility business model treats innovation, because business-as-usual is not a viable option.

As we advocate for changes that reward innovation in the energy industry, we’re pursuing innovation along a number of parallel tracks. Our experience working with technology providers and start-ups tells us energy companies must be involved in the early stages of innovation. We must demonstrate and validate new technologies at a large scale to maximize benefits for all customers.

We are co-presenting an IllumiNation Energy Summit in Columbus, Ohio, with Battelle, The Ohio State University and other sponsors in May 2019. Established technology providers, start-ups, regulators, legislators, environmental organizations, trade groups, academia and research organizations will meet in an immersive technology forum to demonstrate and discuss the technology opportunities we have before us. It also provides an opportunity to engage with policymakers on achieving a clean energy future.

We recently launched our IllumiNationLAB to help us identify promising entrepreneurs and early growth stage companies in four areas: customer experience; grid optimization; efficiency, operations and maintenance; and electric mobility. Our intent is to select promising tech startups to work with an AEP mentor to advance and shape their solutions. We will provide resources and access to subject matter experts and to help start-ups develop products, platforms and processes that we can validate and provide at scale. IllumiNationLAB is focused on renewable energy resources, smart connected devices, customer engagement, predictive analytics and virtual assessments.

We’re also working with Free Electrons, a global technology accelerator for the energy industry, that gives us access to hundreds of start-ups around the world. In 2018, we chartered an Enterprise Innovation and Technology team to establish a new process to test ideas that deliver value to customers and deploy them, if validated. The team is actively seeking partnerships and potential investors to enable us to bring new products to market.

Finally, we’ve created “Charge” – an AEP digital hub that incubates and develops new ideas and creative concepts in a contained space – one that won’t affect day-to-day operations. Our new Chief Digital Officer leads this team with a five-year roadmap to achieve our digital transformation. Each Charge project seeks improved customer or employee experience, while creating financial value (reducing spend, creating efficiencies, or increasing revenue). Charge is a microcosm of what we envision for all of AEP – thinking differently about how our company operates and how we interact with our customers.

Our overall approach to innovation is to check and adjust as we learn. We are carefully managing our investment risk by assessing each new technology to ensure it is something that provides value to customers, will be profitable, feasible and that we clearly understand the resources needed to go to market. We take prudent risks, recognizing that there will be challenges on the road to success, as we innovate to create a new, clean and secure energy future.

Protecting the electric power grid is a major priority for our industry as the system is threatened by natural phenomena like extreme weather or geomagnetic disturbances, or deliberate attacks from malicious hackers or nation-states. We invest in protecting our system and participate in drills to test our defenses to help us prepare for and guard against a potentially catastrophic event. We work in partnership with the federal government to anticipate and respond as effectively as possible. We participate in the Electricity Subsector Coordinating Council that focuses on threat information sharing and coordination between industry and government, research and development and working across sectors, such as with the oil and natural gas industries.

Through the years, the North American Electric Reliability Corporation (NERC) has developed and enforced Critical Infrastructure Protection (CIP) standards to protect the grid from cyber and physical attacks. These standards are constantly evolving, requiring increased focus to ensure compliance. Consequently, in 2018, we strengthened our governance and the central team devoted to ensuring our compliance with the NERC standards.

As we modernize the grid, making it smarter and more resilient, we are also upgrading the telecommunications network which serves as the backbone of the grid, enabling the flow of information and data critically needed to operate the system. This upgrade will enhance cybersecurity and improve reliability and resilience by providing real-time data on equipment condition.

We also take measures to secure and protect employee and customer data. Our Personally Identifiable Information (PII) protection program includes several measures such as blocking outbound emails containing unencrypted PII and a data classification tool that prompts users to classify documents and data before sharing them. We also formed a data governance program to improve how we manage data across the company. This program looks at privacy risks, customer data monitoring and protection, and internal controls to prevent misuse of customer data.

One of our biggest challenges is to ensure that our employees have the knowledge, skills and abilities we need, and they need, to succeed today and in the years ahead. We must understand emerging workforce requirements and ensure that our employees and recruits are being trained and educated to meet them, while strengthening the skills required for our company today. We invest in education and collaborate with others to create the talent pipeline we need.

We must understand emerging workforce requirements and ensure that our employees and recruits are being trained and educated to meet these needs.

We partnered with the Business Roundtable (BRT), the Ohio Business Roundtable and the International Brotherhood of Electrical Workers, as well as community colleges and businesses across central Ohio in 2018 to host the BRT’s Workforce Partnership Initiative (WPI). The WPI will develop education and training opportunities to prepare students, and current AEP employees, for the jobs of the future.

Our charitable foundation’s signature Credits CountSM STEM education program helps high school students who otherwise may not be able to afford a college education to earn college credits toward STEM-related careers while still in high school. The AEP Foundation has committed $14.2 million since we created this program in 2014.

We also launched Transmission University (TU) in 2018, a pilot program to revolutionize learning within AEP. TU provides transmission employees and contractors with self-guided learning opportunities that empower them to take control of their professional development.

We have several development programs across AEP to identify potential company leaders and provide them with skills and experiences that put them on a path for future leadership roles. We partner with numerous colleges, universities and technical schools across the country and we provide experiential learning through apprenticeships and co-ops. We encourage our employees to be continuous learners and provide education assistance to support those efforts. We proudly support and hire military veterans, who bring the technical skills and discipline we need.

A major generational shift is underway as Baby Boomers retire and Generation Z enters the workforce. More people are working independently and remotely in jobs that didn’t exist even a decade ago, such as data analysts, cyber specialists, and renewable energy experts. We are re-imagining many of our traditional job roles and reassessing how we will get our work done in the future.

Workforce development is a critical concern. We must be agile and creative to attract and retain the best talent, including the potential for making advance job commitments to students who successfully complete programs in key areas such as cyber security and data analytics. As technology rapidly changes, so must the knowledge, skills and capabilities of our workforce.

The benefits of converting industrial equipment and processes to be powered by electricity, combined with cleaner energy from the grid and better ways to store it, will lead us on a clear pathway to a low-carbon future and universal access to clean energy. Electrification converts end-uses powered by fossil fuels, such as forklifts and other industrial applications, to electricity.

The road to electrification is complex and challenging, but the long-term reward is significant for the environment, society and business.

As part of our beneficial electrification program, we launched a new website in 2018, www.energyconversionhub.com, for commercial and industrial companies. The site highlights the economic and environmental benefits of using electricity to improve their operations. For example, an online calculator shows the cost and environmental benefits of operating gas or diesel-fueled equipment versus electricity-powered equipment.

The electric vehicle (EV) revolution is accelerating. A 2018 study by the Edison Electric Institute estimates that EVs in the U.S. will increase from 1 million on the road today, to over 18 million by 2030. In our service territory more than 10,000 EVs were registered by the end of 2018. Replacing an internal combustion engine vehicle with a similar EV can reduce first year fuel costs by over 50 percent and tailpipe emissions by about 40 percent. EVs are good for consumers, the environment and the electric industry.

We are well-positioned to play a significant role in supporting EV market development. We are working to increase adoption of EVs and provide charging options that optimize the use of the grid for the benefit of all customers.

To lead by example, we are increasing the proportion of electric cars in our fleet and installing workplace charging infrastructure for employees. We have deployed over 100 EV charging ports at our facilities to date – one of the largest workplace deployments in the U.S. – with plans to expand this number dramatically in coming years.

In 2018, AEP Ohio received regulatory approval for an EV incentive program that offers financial incentives for EV charging stations in workplaces, multi-family housing units, low-income neighborhoods and government-owned properties.

Energy storage plays a vital role in the electrification of the economy and the transition to renewable energy. Batteries can provide back-up power or power during peak demand times and can respond rapidly in order to balance load and generation. They also help us to maintain a constant flow of energy when intermittent resources like wind and solar power are not available or are not needed at the time of generation.

Our 4 MW energy storage system with Appalachian Power’s Buck and Byllesby hydroelectric power plants in Southwest Virginia is one of the first integrated energy storage systems in the PJM transmission region, balancing load and generation to maintain system stability and increase the integration of variable renewable resources. This demonstrates the game-changing impact energy storage can have as the technology matures.

Change has come. It is accelerating, and we stand ready to lead AEP into an innovative energy future that shines for us all. We see many challenges ahead, but also significant opportunities as we work for a sustainable future. We’ve accomplished a great deal over the past decade, but we must lead at an ever-quickening pace. Our strategy to be more innovative, more engaged and more customer-focused is well underway and we will continue to execute it with discipline and conviction. Our 2023 strategy will stretch and push us toward achieving our vision of powering a new and brighter future for our customers and communities.

I am confident that we are well positioned, and on the right road for sustainable growth in the months and years ahead. We have always led the way in our industry and we will continue to work on what matters most to our customers and our communities.

I feel confident about the future whenever I am with our employees. They are the strength and spirit of American Electric Power and I am so proud of what they are doing, and are preparing to do. As we work to create our future, I would like to thank them and our customers for making us a stronger, better company.

I invite you to learn more about AEP in our 2019 Corporate Accountability Report.

Sincerely,
nick akins signature
Nicholas K. Akins
Chairman, President & Chief Executive Officer
American Electric Power