Executing Our Strategy
AEP’s disciplined approach to allocating capital, controlling costs and successfully working through regulatory proceedings continues to strengthen our financial position. Our business model is simple. We have a proven track record of putting capital to work for the benefit of our customers and then earning a return on that investment by efficiently getting it into rates. We do not have major investments in new plants or technologies that put our financial health at risk, allowing us to focus on executing our operational plans. As a result, investors have a clear picture of AEP’s plan for the future and have expressed confidence in our strategy and ability to deliver, based on our current performance.
As AEP’s future takes shape, the road ahead has some challenges. Chief among them is a significant revenue shortfall in 2016 due to the drop in the level of capacity revenues from the PJM capacity auction. We are confident that the investments we are making in our regulated businesses, our efforts to shift costs from future years and ongoing continuous improvement efforts by our employees will close the gap. Our current forecasts show that we will be able to maintain our 4 percent to 6 percent growth rate over the long term as long as we stay the course.
By engaging our employees in the solutions, we are achieving savings and efficiencies that make us more agile and able to adapt more quickly as our industry undergoes significant transformation. One example of how we are doing this is by moving from standard procurement practices to strategic sourcing. This process engages the business units to understand their value drivers, while balancing operational risk with cost considerations. Definitions are developed for measuring cost savings and are tracked internally to validate the value Procurement is bringing to the organization.
Growth will be driven by our ability to invest capital in our regulated companies and earn a fair and timely return. The success of our competitive business will be driven by both the capacity and energy markets as well as our ability to react to those markets. We are evaluating our strategic alternatives for our merchant generation fleet as well as our competitive barge operations.
AEP is in the midst of a transformational transition to shape the utility model of the future. We have capital to invest, and we are deploying it predominantly in our regulated business where it delivers shared value for customers and investors. Our projected annual 4 percent to 6 percent earnings growth rate is predicated on this strategy, as well as our commitment to continued focus on sustainable cost savings and expense discipline. We are giving our employees the tools and processes to advance continuous improvement, and our employees are showing us their ingenuity and know-how to get the job done. By fostering a culture of engagement, we are confident we will meet the challenges ahead of us.