Executive Summary / Key Takeaways

• Transformative Growth Trajectory: American Electric Power (AEP) is undergoing a significant transformation, driven by unprecedented electricity demand from data centers and industrial reshoring across its 11-state footprint. This underpins an ambitious $72 billion capital plan (2026-2030) and an increased long-term operating earnings growth rate of 7% to 9% through 2030, with a 9% compounded annual growth rate.
• Strategic Infrastructure Advantage: AEP's pioneering 765 kV transmission network, the largest in North America, provides a critical competitive moat, enabling efficient, reliable, and high-capacity power delivery essential for large-scale industrial and data center loads. This technological edge is a key differentiator in attracting new economic development.
• Proactive Regulatory and Financial Discipline: The company has successfully secured constructive legislative and regulatory outcomes, including data center tariffs and unified tracker mechanisms, to ensure fair cost allocation and reduce regulatory lag. Proactive equity financing and a strategic minority interest sale have strengthened the balance sheet, targeting an FFO to debt ratio of 14% to 15%.
• Robust Financial Performance: AEP reported strong Q3 2025 operating earnings of $1.80 per share, contributing to a 9% year-over-year increase in year-to-date operating earnings. This performance, coupled with a reaffirmed 2025 guidance (upper half of $5.75-$5.95 per share) and new 2026 guidance ($6.15-$6.45 per share), demonstrates solid execution and confidence in future growth.
• Commitment to Affordability and Innovation: Despite massive capital deployment, AEP is focused on customer affordability, projecting residential rate increases below historical inflation. The company is also actively exploring and deploying innovative solutions like Bloom fuel cells for rapid power deployment and small modular reactors (SMRs) for long-term clean energy needs.

AEP's Enduring Power and Transformative Growth

American Electric Power Company, Inc. (AEP), incorporated in 1906, has long been a foundational player in the U.S. electric utility sector. The company's history is marked by a pioneering spirit, notably its development of the modern 765 kilovolt (kV) transmission system in North America. This early innovation laid the groundwork for AEP's current strategic advantage, positioning it as a leader in delivering high-capacity, reliable power across its expansive 11-state service territory.

Today, AEP stands at the forefront of a transformative period for the energy industry, characterized by unprecedented electricity demand. This surge is primarily fueled by the rapid expansion of data centers, the reshoring of manufacturing, and broader economic development initiatives across the nation. AEP's footprint, particularly in high-growth states like Indiana, Ohio, Oklahoma, and Texas, is emerging as a clear beneficiary of these trends. The company's overarching strategy is to capitalize on this "electrification super cycle" by investing significantly in critical infrastructure, aligning its business with evolving state and federal energy goals, and leveraging its considerable scale to manage costs and optimize its supply chain.

Competitive Landscape and Technological Moats

AEP operates within a highly competitive U.S. utility market, vying with industry heavyweights such as NextEra Energy (NEE), Duke Energy (DUK), Southern Company (SO), and Dominion Energy (D). AEP's competitive positioning is fundamentally rooted in its extensive infrastructure and strategic focus on modernization. The company's vast transmission and distribution network, spanning 40,000 circuit miles of transmission lines and approximately 225,000 circuit miles of distribution lines, provides a wide customer base and ensures reliable power delivery.

AEP's most significant technological differentiator is its 765 kV transmission system. Since 1961, AEP has pioneered and developed these Extra High Voltage (EHV) lines, which represent the highest voltage level in North America. AEP operates over 2,200 miles of 765 kV transmission lines across six states, constituting the largest network of its kind in the country. This infrastructure offers substantial benefits: a single 765 kV circuit can carry up to six times the power of a 345 kV line, leading to more power with fewer lines and minimizing environmental impact. Furthermore, these lines exhibit superior efficiency, with half the transmission losses of lower voltage systems, and require a smaller overall footprint, reducing right-of-way needs and construction costs compared to equivalent 345 kV systems. The 765 kV system also demonstrates enhanced reliability, with outages 1.75 times less frequent than 345 kV in Indiana Michigan Power's territory and 5.7 times less frequent for momentary outages. This robust, high-capacity backbone is crucial for connecting customers to diverse generation sources and is a catalyst for economic development.

Compared to competitors like Duke Energy and Southern Company, AEP's extensive 765 kV transmission network provides a distinct advantage in attracting and serving large industrial and data center loads. While Duke and Southern possess significant operational scale and established market presences, AEP's specialized transmission expertise allows for potentially faster deployment of new, high-capacity infrastructure, which is critical in the current environment of surging demand. This technological moat enhances AEP's pricing power and market share in regions requiring substantial power delivery.

AEP also actively pursues new technological developments to meet future energy needs. The company is exploring Small Modular Reactors (SMRs), recognizing their potential to provide safe, reliable, and clean baseload energy 24/7/365. AEP, through its subsidiaries like Indiana Michigan Power (IM) and Appalachian Power (APCo), is seeking early site permits for SMR locations in Indiana and Virginia. SMRs offer advantages such as a relatively small physical footprint, scalability to match state energy needs, and the ability to generate 50 to 500 megawatts (MW) of clean energy, enough to power up to 500,000 homes annually. AEP's strategy emphasizes "appropriate risk sharing" for SMR deployment, ensuring capital investment protections and balance sheet safeguards.

In the near term, AEP has partnered with Bloom Energy (BE) to deploy solid oxide fuel cells (SOFCs) as a custom solution for large customers, particularly data centers. AEP has an agreement to secure up to 1 gigawatt (GW) of Bloom Energy fuel cells, with an initial order for 100 MW. This initiative is the largest utility fuel cell technology deployment in the U.S.. Bloom's fuel cells can be rapidly deployed, offer very high availability, and have a high-power density of 100 MW per acre. When running on natural gas, they provide 34% lower CO2 emissions than displaced marginal generation resources in PJM and virtually eliminate SOx and NOx emissions. These fuel cells serve as a "bridge solution" to quickly power data centers while grid infrastructure is built out, with all project costs covered by the large customers under special contracts. This innovation allows AEP to solve immediate power needs for data centers, reducing grid strain and accelerating economic development.

AEP's commitment to innovation extends to its internal research and development, supported by the John E. Dolan Laboratory since 1987. The company also launched IlluminationLAB in 2019, a strategic initiative to identify innovative technology solutions in areas like grid optimization, efficiency, customer experience, and electric mobility. These technological advancements, from its foundational transmission network to emerging energy solutions, collectively form a robust competitive moat, enhancing AEP's ability to attract and serve growing demand, improve financial performance through efficient operations, and secure its market position against rivals.

Financial Strength and Operational Momentum

AEP has demonstrated robust financial performance, reflecting its strategic execution and operational effectiveness. For the third quarter of 2025, AEP reported operating earnings of $1.80 per share, totaling $963 million. This contributed to a significant 9% year-over-year increase in year-to-date operating earnings, reaching $4.78 per share. This strong performance was primarily driven by strategic investments in transmission assets, favorable rate proceedings across various jurisdictions, and the positive impact of a June 2025 FERC order related to the treatment of Net Operating Loss Carryforwards (NOLCs) in transmission formula rates, which resulted in a $480 million increase to GAAP earnings in Q2 2025.

Load growth has been a central theme in AEP's financial narrative. Commercial sales volumes saw a notable increase, primarily due to new data processor loads. On a rolling 12-month basis as of September 30, 2025, commercial and industrial load growth was nearly 8%. This demand is translating directly into revenue, with a $200 million year-over-year increase in revenues noted in Q2 2025, largely due to new data centers and industrial customers coming online in Indiana, Ohio, and Texas. The company's first quarter 2025 earned Return on Equity (ROE) for its regulated businesses improved to 9.3%, up from 9.05% at year-end 2024, indicating effective regulatory management.

AEP's liquidity position remains strong, with approximately $6.80 billion of available liquidity as of September 30, 2025, supported by $6 billion in revolving credit facilities. The company's debt-to-total capitalization ratio decreased to 60% by September 30, 2025, from 62.60% at December 31, 2024, reflecting improved earnings and strategic financial transactions.

The FFO to debt ratio, a key credit metric, stood at 15.7% (S&P) in Q3 2025, exceeding the target range of 14% to 15%. This financial strength is crucial for funding AEP's ambitious capital plans.

Strategic Initiatives and Capital Deployment

AEP's strategic initiatives are deeply intertwined with its capital deployment, aiming to meet the burgeoning energy demand and enhance grid reliability. The company announced a new $72 billion 5-year capital plan for 2026-2030, representing a more than 30% increase over its previous plan. This substantial investment is expected to drive a 10% 5-year rate base Compound Annual Growth Rate (CAGR). Over two-thirds of this capital is allocated to transmission and generation, with the remainder focused on strengthening the distribution network through system enhancements and grid modernization.

The capital plan is directly supported by significant load growth projections. AEP anticipates a system peak demand of 65 gigawatts by 2030, including 28 gigawatts of contracted load additions, representing an almost 76% increase in load over the next five years. This contracted load is backed by electric service agreements (ESAs) or letters of agreement (LOAs), providing financial protection against changes in planned usage. The company also has approximately 190 gigawatts of additional load actively seeking to connect to its system, highlighting the immense future growth potential.

AEP has been proactive in securing favorable regulatory and legislative outcomes to support these investments. Key legislative successes in 2025 include:

• Ohio House Bill 15 (HB 15): Establishes a new regulatory framework with a multi-year forward-looking test period and true-up provisions for AEP Ohio rate cases, promoting timely and efficient recovery of investments.
• Oklahoma Senate Bill 998 (SB 998): Authorizes the deferral of plant costs placed in service between rate cases at Public Service Company of Oklahoma (PSO), intended to encourage investment, reduce regulatory lag, and increase earnings recognition.
• Texas House Bill 5247 (HB 5247): Creates a Unified Tracker Mechanism (UTM) for qualifying electric utilities like AEP Texas, allowing a single annual filing for transmission and distribution capital expenditures, effectively eliminating regulatory lag and substantially improving earned ROEs. This is expected to increase AEP Texas's ROEs by 50 to 100 basis points.

In terms of generation, AEP is expanding its portfolio to meet increasing demand and ensure reliability. In 2025, PSO acquired the Green Country Power Plant (795 MW natural gas), Pixley Solar Energy Facility (189 MW), Flat Ridge IV Wind Energy Facility (135 MW), and Flat Ridge V Wind Energy Facility (153 MW). SWEPCo has filed for a Certificate of Convenience and Necessity (CCN) for the Hallsville Natural Gas Plant (450 MW) and the conversion of Welsh Plant Units 1 and 3 to natural gas. Indiana Michigan Power (IM) reached a unanimous settlement to acquire the Oregon Generation Plant (870 MW combined-cycle natural gas facility). AEP has also received regulatory approvals for approximately 1826 MWs of owned renewable generation facilities and 1059 MWs of renewable Power Purchase Agreements (PPAs).

Financing for this ambitious plan includes a modest $5.9 billion in growth equity, with over 80% projected to be issued in the latter half of the 5-year plan. AEP proactively completed a $2.3 billion forward equity offering in Q1 2025 and closed a $2.82 billion minority interest transaction with KKR (KKR) and PSP Investments for a 19.90% stake in its Ohio and Indiana Michigan transmission companies in June 2025. This transaction was highly accretive, valued at 2.3 times rate base and 30.3 times price to earnings, equivalent to issuing AEP common stock at $170 per share. Additionally, AEP secured a $1.6 billion loan guarantee from the U.S. Department of Energy to upgrade nearly 5,000 miles of transmission lines, saving customers an estimated $275 million in financing costs.

Outlook, Guidance, and Risk Management

AEP's outlook is characterized by strong confidence in its growth trajectory and financial commitments. The company reaffirmed its 2025 full-year operating earnings guidance in the upper half of the $5.75 to $5.95 per share range. For 2026, AEP projects operating earnings of $6.15 to $6.45 per share, an approximate 8% increase from the 2025 midpoint. The long-term operating earnings growth rate has been increased to 7% to 9% annually from 2026 through 2030, with an expected 9% compounded annual growth rate over the five-year period. Management anticipates growth to be in the lower half of this range for the first two years, accelerating to at or above the high end in 2028, 2029, and 2030.

A core focus remains on customer affordability. AEP forecasts residential customer rates to increase by approximately 3.5% annually over the 5-year period, which is below the 5-year historical average inflation rate of over 4%. This is achieved through incremental load growth, rate design, a continuous focus on operational and maintenance (O&M) efficiency, and financing mechanisms like securitization.

However, AEP operates in a complex environment with inherent risks. Environmental compliance costs, particularly related to Federal EPA's revised Coal Combustion Residual (CCR) rules and Greenhouse Gas (GHG) regulations, could lead to significant capital investments, accelerated depreciation, or regulatory disallowances. The company is actively evaluating the impact of these rules on its generating fleet and seeking cost recovery through regulated rates. Regulatory proceedings, such as the West Virginia base rate case where AEP has filed for reconsideration on authorized ROE and capital structure, also present ongoing risks. Litigation, extreme weather events, and supply chain disruptions further contribute to the risk profile. AEP mitigates these risks through fair cost allocation mechanisms, take-or-pay contracts for large loads, diversified demand, and robust risk management strategies.

Conclusion

American Electric Power is embarking on a period of profound transformation, positioning itself as a high-growth, high-quality pure-play electric utility. The company's core investment thesis is underpinned by its strategic advantage in transmission infrastructure, particularly its pioneering 765 kV network, which is uniquely suited to meet the surging electricity demands from data centers and industrial reshoring. This technological leadership, coupled with a disciplined approach to capital allocation and proactive engagement with regulators, forms a powerful foundation for sustained value creation.

AEP's ambitious $72 billion capital plan and increased long-term operating earnings growth rate reflect management's confidence in its ability to execute and capitalize on these generational opportunities. While challenges such as environmental compliance and regulatory complexities persist, AEP's strategic initiatives, including innovative energy solutions like fuel cells and SMRs, demonstrate a forward-thinking approach to grid modernization and resource adequacy. For investors, AEP offers a compelling narrative of growth, operational excellence, and financial discipline, with a clear roadmap to enhance shareholder value while maintaining customer affordability in a rapidly evolving energy landscape.