American Electric Power(AEP) - 2025 Q2 - Quarterly Report

Part I. FINANCIAL INFORMATION Management's Discussion and Analysis of Financial Condition and Results of Operations (AEP Consolidated) AEP's Q2 and H1 2025 earnings significantly increased, driven by a favorable FERC NOLC order, rate proceedings, and higher sales, supported by strategic portfolio management and robust liquidity Executive Overview AEP's GAAP earnings significantly increased in Q2 and H1 2025, driven by a favorable FERC NOLC order, rate proceedings, and higher sales volumes AEP Consolidated Earnings Performance (GAAP) | Period | 2025 Earnings (in billions) | 2024 Earnings (in millions) | Change (in millions) | Key Drivers | | :--- | :--- | :--- | :--- | :--- | | Q2 | $1.2 | $340 | $860 | Favorable FERC NOLC order, Favorable rate proceedings | | H1 | $2.0 | $1,300 | $700 | Favorable FERC NOLC order, Increased sales volumes, Favorable rate proceedings | Reconciliation of AEP GAAP Earnings to Operating Earnings (Q2) | (in billions) | Q2 2025 | Q2 2024 | | :--- | :--- | :--- | | Reported GAAP Earnings | $1.23 | $340.3 | | Mark-to-Market Impact | $20.0 | $(7.2) | | FERC NOLC Order | $(480.1) | — | | Provision for Refund - Turk Plant | — | $126.4 | | Severance Charges | — | $93.6 | | Federal EPA CCR Rule | — | $110.7 | | Other Specified Items | — | $(1.4) | | Operating Earnings | $765.7 | $662.0 | Reconciliation of AEP GAAP Earnings to Operating Earnings (H1) | (in billions) | H1 2025 | H1 2024 | | :--- | :--- | :--- | | Reported GAAP Earnings | $2.03 | $1.34 | | Mark-to-Market Impact | $6.0 | $(59.0) | | FERC NOLC Order | $(480.1) | — | | Impact of NOLC on Retail Ratemaking | — | $(259.6) | | Provision for Refund - Turk Plant | — | $126.4 | | Severance Charges | — | $93.6 | | Federal EPA CCR Rule | — | $110.7 | | Other Specified Items | $37.1 | $(23.1) | | Operating Earnings | $1.59 | $1.33 | Recent Developments and Transactions AEP's recent actions include a favorable FERC NOLC order, a $2.78 billion transmission asset sale, PSO's $1.4 billion generation acquisitions, and adapting to new legislation - A June 2025 FERC order regarding NOLCs in transmission formula rates resulted in a $499 million increase in Earnings Attributable to AEP Common Shareholders for Q2 and H1 2025, due to recognizing revenues for 2021-2025 and reducing Excess ADIT regulatory liabilities[37] - In June 2025, AEP closed a transaction for a 19.9% noncontrolling interest in its OHTCo and IMTCo subsidiaries, receiving net cash proceeds of approximately $2.78 billion, which will support AEP's $54 billion capital plan for 2025-2029[44] PSO New Generation Acquisitions (Q2 2025) | Plant Name | Fuel Type | Generating Capacity (MW) | Total Cost (in billions) | | :--- | :--- | :--- | :--- | | Green Country | Natural Gas | 795 | $1.4 (total for all three) | | Pixley | Solar | 189 | | | Flat Ridge IV | Wind | 135 | | - New legislation was enacted in Ohio (HB 15), Texas (HB 5247), and Oklahoma (SB 998), altering rate-setting mechanisms, establishing capital expenditure tracking, and allowing for deferred cost recovery, while federal tax legislation (OBBBA) modified renewable tax credits and made bonus depreciation permanent for non-regulated entities[49][51][53][54] - AEP has received regulatory approvals to acquire approximately 1,979 MW of owned renewable generation facilities for about $4.7 billion and has active RFPs for an additional 7,700 MW of generation to meet rising customer demand[74][78][79] Results of Operations AEP's consolidated earnings increased to $1.23 billion in Q2 2025, with all segments showing growth driven by a favorable FERC NOLC order, rate cases, and higher market prices Earnings Attributable to AEP Common Shareholders by Segment (in millions) | Segment | Q2 2025 | Q2 2024 | H1 2025 (in billions) | H1 2024 (in billions) | | :--- | :--- | :--- | :--- | :--- | | Vertically Integrated Utilities | $432.7 | $65.7 | $756.8 | $626.5 | | Transmission and Distribution Utilities | $223.9 | $146.8 | $388.5 | $297.1 | | AEP Transmission Holdco | $578.4 | $200.7 | $813.0 | $409.4 | | Generation & Marketing | $62.1 | $(4.8) | $164.5 | $132.8 | | Corporate and Other | $(71.3) | $(68.1) | $(96.8) | $(122.4) | | Total | $1,225.8 | $340.3 | $2.03 | $1.34 | Vertically Integrated Utilities Vertically Integrated Utilities' Q2 2025 earnings increased to $432.7 million, primarily from a $160 million Turk Plant revenue refund reversal, higher base rates, and the FERC NOLC order - Retail revenues for the segment increased by $287 million in Q2 2025 compared to Q2 2024, with a major factor being a $160 million revenue refund provision related to the Turk Plant that negatively impacted 2024 results[132] - Transmission revenues rose by $63 million in Q2 2025, primarily due to the favorable June 2025 FERC order regarding the treatment of NOLCs in transmission formula rates[133] - Other Operation and Maintenance expenses increased by $29 million, largely due to a $53 million expense related to the FERC NOLC order and higher distribution costs, partially offset by a $76 million decrease in employee-related expenses from a 2024 voluntary severance program[133] Transmission and Distribution Utilities Transmission and Distribution Utilities' Q2 2025 earnings increased to $223.9 million, driven by higher retail revenues and a $53 million decrease in asset impairment charges related to the 2024 EPA CCR rule - Retail revenues increased by $38 million in Q2 2025, mainly due to a $43 million increase in base case and rider revenues and a $24 million increase in weather-normalized sales in Ohio[140] - Asset Impairments and Other Related Charges decreased by $53 million, primarily because of charges recorded in 2024 related to the Federal EPA's revised CCR rules[142] - Other Operation and Maintenance expenses rose by $20 million, driven by higher recoverable transmission expenses and T&D-related costs in Texas, partially offset by a $33 million decrease in employee expenses from the 2024 severance program[142] AEP Transmission Holdco AEP Transmission Holdco's Q2 2025 earnings surged to $578.4 million, primarily from a $267 million rise in transmission revenues due to the FERC NOLC order and investments - Transmission revenues increased by $267 million in Q2 2025, driven by a $214 million favorable impact from the June 2025 FERC order on NOLCs and a $50 million increase from ongoing transmission investments[147] - Income tax expense decreased by $196 million, primarily due to a $254 million reduction in Excess ADIT as a result of the FERC NOLC order[149] - Net income attributable to noncontrolling interests increased by $61 million due to the Midwest Transmission noncontrolling interest transaction that closed in June 2025[149] Generation & Marketing Generation & Marketing reported Q2 2025 earnings of $62.1 million, a turnaround from a prior-year loss, driven by higher revenues from MTM hedging and market prices, and reduced asset impairment charges - Retail, Trading and Marketing revenues increased by $92 million in Q2 2025, primarily due to higher mark-to-market (MTM) hedging activity and higher market prices[151] - Asset Impairments and Other Related Charges decreased by $76 million compared to Q2 2024, which had included charges related to the Federal EPA's revised CCR rules[151] - Other Operation and Maintenance expenses decreased by $43 million, mainly due to renewable contract termination proceeds in 2025 and the sale of Onsite Partners in September 2024[151] Corporate and Other Corporate and Other reported a slightly larger Q2 2025 loss of $71 million, primarily due to decreased earnings from AEP T&D Services and higher EIS reserves, partially offset by an increased income tax benefit - For the six months ended June 30, the loss decreased from $122 million in 2024 to $97 million in 2025, driven by a $28 million increase in income tax benefit, a $13 million decrease in interest expense, and an $11 million increase from recognizing deferred revenues[153] Financial Condition AEP's financial condition improved with a lower debt-to-total capital ratio, $5.6 billion in liquidity, and $2.25 billion from a forward equity sale to fund its $11.5 billion 2025 capital plan Debt and Equity Capitalization (in billions) | Category | June 30, 2025 | % of Total | Dec 31, 2024 | % of Total | | :--- | :--- | :--- | :--- | :--- | | Total Debt | $46.03 | 59.8% | $45.17 | 62.6% | | AEP Common Equity | $29.87 | 38.8% | $26.94 | 37.3% | | Noncontrolling Interests | $1.10 | 1.4% | $42.3 | 0.1% | | Total Capitalization | $77.00 | 100.0% | $72.15 | 100.0% | Net Available Liquidity as of June 30, 2025 (in billions) | Source | Amount | | :--- | :--- | | Revolving Credit Facilities | $6.0 | | Cash and Cash Equivalents | $227.3 | | Total Liquidity Sources | $6.23 | | Less: AEP Commercial Paper Outstanding | $(600.0) | | Net Available Liquidity | $5.63 | - AEP forecasts approximately $11.5 billion of capital expenditures in 2025 and $42.9 billion for the four-year period from 2026 through 2029, driven by investments in transmission, distribution, and new generation[178] Net Cash Flow Summary (Six Months Ended June 30, in billions) | Cash Flow Activity | 2025 | 2024 | | :--- | :--- | :--- | | Net Cash Flows from Operating Activities | $2.67 | $2.90 | | Net Cash Flows Used for Investing Activities | $(5.35) | $(3.25) | | Net Cash Flows from Financing Activities | $2.71 | $214.4 | Quantitative and Qualitative Disclosures About Market Risk AEP manages market risks including commodity prices, interest rates, and credit risk, with a total MTM derivative net asset value of $430.5 million and minimal sub-investment grade credit exposure - The total Mark-to-Market (MTM) value of derivative contract net assets increased from $205.6 million at year-end 2024 to $441.9 million as of June 30, 2025, before accounting for hedges and collateral[189] Counterparty Credit Exposure as of June 30, 2025 (in millions) | Counterparty Credit Quality | Net Exposure | | :--- | :--- | | Investment Grade | $547.9 | | Non-investment Grade | $3.5 | | No External Ratings (Internal Grades) | $52.3 | | Total | $603.7 | - A 100 basis point change in the benchmark interest rate on AEP's variable rate debt would impact annual pretax interest expense by $34 million for the six months ended June 30, 2025[200] Condensed Consolidated Financial Statements (AEP Consolidated) AEP's H1 2025 consolidated financial statements show increased profitability with total revenues of $10.55 billion and net income of $2.03 billion, and a stronger balance sheet with total assets of $107.8 billion AEP Condensed Consolidated Financial Highlights (Six Months Ended June 30) | (in billions) | 2025 | 2024 | | :--- | :--- | :--- | | Total Revenues | $10.55 | $9.60 | | Operating Income | $2.68 | $1.86 | | Earnings Attributable to AEP Common Shareholders | $2.03 | $1.34 | AEP Condensed Consolidated Balance Sheet Highlights (in billions) | | June 30, 2025 | Dec 31, 2024 | | :--- | :--- | :--- | | Total Assets | $107.78 | $103.08 | | Total Liabilities | $76.76 | $76.05 | | Total AEP Common Shareholders' Equity | $29.87 | $26.94 | AEP Texas Inc. and Subsidiaries AEP Texas reported a Q2 2025 net income of $121.1 million, a decrease due to lower other revenues and higher O&M expenses, while H1 2025 net income increased to $222.7 million from higher retail revenues AEP Texas Net Income (in millions) | Period | 2025 | 2024 | | :--- | :--- | :--- | | Q2 | $121.1 | $128.4 | | H1 | $222.7 | $208.1 | - Q2 2025 revenues decreased by $8.4 million year-over-year, as a $24 million increase in retail revenues was more than offset by a $23 million decrease in other revenues (due to matured securitization bonds) and a $9 million decrease in transmission revenues[220][221][223] - For H1 2025, total revenues increased by $48.2 million, primarily driven by an $82 million increase in retail revenues from higher base rates and favorable weather[220][225] AEP Transmission Company, LLC and Subsidiaries AEPTCo's Q2 2025 earnings surged to $555.8 million, primarily from a $267 million increase in transmission revenues due to the FERC NOLC order and investments, with total assets growing to $16.4 billion AEPTCo Earnings Attributable to Common Shareholder (in millions) | Period | 2025 | 2024 | | :--- | :--- | :--- | | Q2 | $555.8 | $175.7 | | H1 | $767.3 | $356.9 | - The primary driver for the earnings increase was a $267 million rise in Q2 transmission revenues, which included a $214 million favorable impact from the June 2025 FERC order on NOLCs and a $49 million increase from continued investment[244] - Total Member's Equity increased to $7.7 billion as of June 30, 2025, from $7.0 billion at year-end 2024, largely due to the Midwest Transmission noncontrolling interest transaction which added $2.78 billion to equity[251] Appalachian Power Company and Subsidiaries APCo's Q2 2025 net income increased to $106.9 million, driven by higher total revenues from investment and the FERC NOLC order, and H1 net income reached $271.5 million from increased retail revenues APCo Net Income (in millions) | Period | 2025 | 2024 | | :--- | :--- | :--- | | Q2 | $106.9 | $58.3 | | H1 | $271.5 | $194.8 | - Q2 2025 earnings were boosted by a $14 million decrease in fuel and purchased power expenses and a $26 million decrease in income tax expense, both related to the June 2025 FERC NOLC order[265][266] - For H1 2025, retail revenues increased by $107 million year-over-year, driven by higher fuel revenues ($35 million) and a $34 million increase from favorable weather (a 39% increase in heating degree days)[266] Indiana Michigan Power Company and Subsidiaries I&M's Q2 2025 net income significantly increased to $124.1 million, driven by an $83 million rise in retail revenues and $57 million from off-system sales, with H1 net income comparable to prior year at $181.6 million I&M Net Income (in millions) | Period | 2025 | 2024 | | :--- | :--- | :--- | | Q2 | $124.1 | $35.2 | | H1 | $181.6 | $180.2 | - Q2 2025 retail revenues increased by $83 million year-over-year, primarily due to a $35 million increase from new base rates in Indiana and Michigan and a $34 million increase in weather-normalized margins[289] - Income tax benefit for Q2 2025 increased by $23 million, mainly due to a $32 million benefit from a reduction in Excess ADIT related to the June 2025 FERC NOLC order[290] Ohio Power Company and Subsidiaries OPCo's Q2 2025 net income substantially increased to $102.8 million, primarily due to a $53 million decrease in asset impairment charges related to the 2024 EPA CCR rule, with H1 net income reaching $165.8 million OPCo Net Income (in millions) | Period | 2025 | 2024 | | :--- | :--- | :--- | | Q2 | $102.8 | $18.4 | | H1 | $165.8 | $89.0 | - The primary driver for the Q2 2025 earnings increase was a $53 million decrease in Asset Impairments and Other Related Charges, as the prior-year period included charges for the Federal EPA's revised CCR rules[316] - For H1 2025, a $30 million estimated reduction in regulatory assets for OVEC-related purchased power costs was recorded due to new Ohio legislation (HB 15), which limited future cost recovery[316] Public Service Company of Oklahoma PSO reported Q2 2025 net income of $63.7 million, driven by higher base rate revenues and a FERC NOLC order tax benefit, while H1 net income decreased to $91.2 million due to a prior-year IRS PLR tax benefit PSO Net Income (in millions) | Period | 2025 | 2024 | | :--- | :--- | :--- | | Q2 | $63.7 | $36.3 | | H1 | $91.2 | $108.3 | - Q2 2025 retail revenues increased by $11 million, reflecting a $36 million rise in base rate and rider revenues, partially offset by a $20 million decrease from lower weather-related usage[337] - The decrease in H1 2025 net income was primarily due to a $48 million tax benefit recorded in H1 2024 related to an IRS PLR for NOLCs, which was not repeated in 2025[339] Southwestern Electric Power Company Consolidated SWEPCo reported a significant Q2 2025 earnings turnaround to $115.6 million from a prior-year loss, primarily due to a $160 million Turk Plant revenue refund provision reversal SWEPCo Earnings (Loss) Attributable to Common Shareholder (in millions) | Period | 2025 | 2024 | | :--- | :--- | :--- | | Q2 | $115.6 | $(70.1) | | H1 | $164.1 | $138.0 | - The dramatic swing in Q2 earnings was primarily due to a $160 million revenue refund provision recorded in Q2 2024 associated with the Turk Plant, which did not recur in 2025[360] - H1 2025 income tax benefit was significantly lower than in H1 2024, as the 2024 period included a $109 million benefit from a reduction in Excess ADIT regulatory liabilities due to an IRS PLR on NOLCs[363] Notes to Condensed Financial Statements The notes detail rate matters, including the $499 million FERC NOLC order impact, environmental liabilities, PSO's $1.4 billion generation acquisition, the $2.78 billion transmission asset sale, and financing - Rate Matters: The company is actively engaged in numerous rate proceedings, with a key development being the June 2025 FERC order on NOLCs, which resulted in a $499 million earnings increase for AEP Consolidated, and several subsidiaries have pending base rate cases and securitization filings to recover costs[405][491][492] - Acquisitions & Dispositions: In Q2 2025, PSO acquired three generation facilities for $1.4 billion, and in June 2025, AEP closed the sale of a 19.9% noncontrolling interest in its OHTCo and IMTCo transmission subsidiaries for approximately $2.78 billion in net proceeds[515][519] - Financing Activities: In March 2025, AEP entered into forward sale agreements for 22.5 million shares, expecting to raise approximately $2.25 billion by December 2026, and the company also details various long-term debt issuances and retirements across its subsidiaries during the first half of 2025[645][647] - Commitments & Contingencies: AEP recorded a $674 million increase in Asset Retirement Obligations (ARO) in Q2 2024 due to the EPA's revised CCR Rule, and the company is managing this and other environmental compliance costs, seeking recovery through regulated rates[505] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2025, ensuring timely and accurate SEC reporting, with no material changes to internal control over financial reporting during Q2 2025 - As of June 30, 2025, the principal executive and financial officers concluded that the disclosure controls and procedures are effective[725] - No material changes were made to the internal control over financial reporting during the second quarter of 2025[726] Part II. OTHER INFORMATION Risk Factors The company updated its risk factors to include the potential adverse impact of changes in U.S. or foreign trade policies, such as tariffs, which could increase costs and negatively affect financial results - A new risk factor highlights that changes in U.S. or foreign trade policies, including tariffs and other restrictive measures, could increase costs, extend lead times, and adversely impact financial results[729] Other Information On May 15, 2025, Director Benjamin G. S. Fowke, III, and EVP Kelly J. Ferneau entered into Rule 10b5-1 trading plans for the potential sale of up to 25,000 and 10,218 shares of common stock, respectively - On May 15, 2025, Director Benjamin G. S. Fowke, III, and EVP Kelly J. Ferneau entered into Rule 10b5-1 trading plans for the potential sale of up to 25,000 and 10,218 shares of common stock, respectively[733][734]