# How American Electric Power makes money

CXProWealth Business Lens · American Electric Power (AEP) · Q3 FY2026

Read from the 10-Q for the period 2026-07-01 to 2026-09-30, filed 2026-10-28 with the SEC (accession 0000004904-26-000072): https://www.sec.gov/Archives/edgar/data/4904/000000490426000072/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $6.8B (+34.3% on the year)
- Operating income: $1.8B (operating margin 26.5%)
- Net income: $1.2B (net margin 17.8%)
- Gross margin: not reported (the company reports expenses by nature: no cost of revenue or gross profit line exists)
- Free cash flow: —
- Cash conversion (operating cash flow / net income): —
- Capital expenditure: — of revenue

## Where the money goes (Q3 FY2026)

- Vertically Integrated Utilities → Total revenues: $3.9B
- Transmission and Distribution Utilities → Total revenues: $1.9B
- Generation & Marketing Revenues → Total revenues: $922.0M
- Other Revenues → Total revenues: $134.0M
- Total revenues → Total expenses: $5.0B
- Total expenses → Depreciation and Amortization: $1.0B
- Total expenses → Maintenance: $447.0M
- Total expenses → Other Operation: $1.0B
- Total expenses → Taxes Other Than Income Taxes: $433.0M
- Total expenses → Purchased Electricity, Fuel and Other Consumables Used for Electric Generation: $2.1B
- Total revenues → Operating income: $1.8B
- Operating income → Interest Expense: $606.0M
- Operating income → Income before income tax expense (benefit): $1.2B
- Allowance for Equity Funds Used During Construction → Income before income tax expense (benefit): $81.0M
- Non-Service Cost Components of Net Periodic Benefit Cost → Income before income tax expense (benefit): $25.0M
- Other Income → Income before income tax expense (benefit): $6.0M
- Income before income tax expense (benefit) → Income Tax Expense: $125.0M
- Income before income tax expense (benefit) → Net income: $1.2B
- Equity Earnings of Unconsolidated Subsidiaries → Net income: $25.0M

## Where the revenue comes from

### Products and services (CONDENSED CONSOLIDATED STATEMENTS OF INCOME)

| Member | Value | Share |
|---|---:|---:|
| Vertically Integrated Utilities | $3.9B | 57.4% |
| Transmission and Distribution Utilities | $1.9B | 27.1% |
| Generation & Marketing Revenues | $922.0M | 13.5% |
| Other Revenues | $134.0M | 2.0% |

The members sum to total revenue.

### Segments (BUSINESS SEGMENTS - Schedule of AEP's Reportable Segment Information (Details))

| Member | Value | Share |
|---|---:|---:|
| VIU | $4.0B | 58.6% |
| T&D | $1.9B | 27.3% |
| G&M | $950.0M | 13.9% |
| AEPTHCo | $615.0M | 9.0% |

The members do not sum to total revenue.

### RelatedPartyTransactionsByRelatedParty (BUSINESS SEGMENTS - Schedule of AEP's Reportable Segment Information (Details))

| Member | Value | Share |
|---|---:|---:|
| Nonrelated Party | $6.8B | 100.0% |
| Related Party | $0 | 0.0% |

The members sum to total revenue.

### LegalEntity (REVENUE FROM CONTRACTS WITH CUSTOMERS - Disaggregation of Revenue (Details))

| Member | Value | Share |
|---|---:|---:|
| OPCo | $1.2B | 17.7% |
| APCo | $1.1B | 16.6% |
| I&M | $894.0M | 13.1% |
| PSO | $868.0M | 12.7% |
| SWEPCo | $770.0M | 11.3% |
| AEP Texas | $659.0M | 9.6% |
| AEPTCo | $594.0M | 8.7% |

The members do not sum to total revenue.

### ConsolidationItems (BUSINESS SEGMENTS - Schedule of AEP's Reportable Segment Information (Details))

| Member | Value | Share |
|---|---:|---:|
| Operating Segments | $7.4B | 108.8% |
| Corporate and Other | $38.0M | 0.6% |
| Reconciling Adjustments | -$640.0M | -9.4% |

The members sum to total revenue.

## Income statement, as filed

| Line | Q3 FY2026 | Of revenue |
|---|---:|---:|
| Total revenues | $6.8B | 100% |
|   Vertically Integrated Utilities | $3.9B | 57.4% |
|   Transmission and Distribution Utilities | $1.9B | 27.1% |
|   Generation & Marketing Revenues | $922.0M | 13.5% |
|   Other Revenues | $134.0M | 2.0% |
| Purchased Electricity, Fuel and Other Consumables Used for Electric Generation | $2.1B | 30.5% |
| Other Operation | $1.0B | 15.0% |
| Maintenance | $447.0M | 6.5% |
| Asset Impairments and Other Related Charges | $0 | 0.0% |
| Depreciation and Amortization | $1.0B | 15.0% |
| Taxes Other Than Income Taxes | $433.0M | 6.3% |
| **Total expenses** | $5.0B | 73.5% |
| **Operating income** | $1.8B | 26.5% |
| Other Income | $6.0M | 0.1% |
| Allowance for Equity Funds Used During Construction | $81.0M | 1.2% |
| Non-Service Cost Components of Net Periodic Benefit Cost | (-$25.0M) | 0.4% |
| Interest Expense | ($606.0M) | 8.9% |
| **Income before income tax expense (benefit)** | $1.3B | 19.3% |
| Income Tax Expense | $125.0M | 1.8% |
| Equity Earnings of Unconsolidated Subsidiaries | $25.0M | 0.4% |
| **Net income** | $1.2B | 17.8% |
| Net Income Attributable to Noncontrolling Interests | $31.0M | 0.5% |
| **EARNINGS (LOSS) ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS, Basic** | $1.2B | 17.4% |
| **EARNINGS (LOSS) ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS, Diluted** | $1.2B | 17.4% |
| WEIGHTED AVERAGE NUMBER OF BASIC AEP COMMON SHARES OUTSTANDING (in shares) | 544,400,000 |  |
| TOTAL BASIC EARNINGS PER SHARE ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS (in dollars per share) | $2 | 0.0% |
| WEIGHTED AVERAGE NUMBER OF DILUTED AEP COMMON SHARES OUTSTANDING (in shares) | 550,100,000 |  |
| TOTAL DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS (in dollars per share) | $2 | 0.0% |

## History

| Period | Revenue | Operating income | Net income | Operating cash flow | Capital expenditure | Free cash flow |
|---|---:|---:|---:|---:|---:|---:|
| FY2007 | $13.4B | $2.3B | $1.1B | $2.4B | $512.0M | $1.9B |
| FY2008 | $14.4B | $2.8B | $1.4B | $2.6B | $160.0M | $2.4B |
| FY2009 | $13.5B | $2.8B | $1.4B | $2.5B | $104.0M | $2.4B |
| FY2010 | $14.4B | $2.7B | $1.2B | $2.7B | $155.0M | $2.5B |
| FY2011 | $15.1B | $2.8B | $1.9B | $3.8B | $19.0M | $3.8B |
| FY2012 | $14.9B | $2.7B | $1.3B | $3.8B | $94.0M | $3.7B |
| FY2013 | $14.8B | $2.8B | $1.5B | $4.1B | $32.0M | $4.1B |
| FY2014 | $16.4B | $3.1B | $1.6B | $4.6B | $64.8M | $4.5B |
| FY2015 | $16.5B | $3.3B | $2.1B | $4.7B | $5.3M | $4.7B |
| FY2016 | $16.4B | $1.2B | $618.0M | $4.5B | $107.9M | $4.4B |
| FY2017 | $15.4B | $3.5B | $1.9B | $4.3B | $0 | $4.3B |
| FY2018 | $16.2B | $2.7B | $1.9B | $5.2B | $0 | $5.2B |
| FY2019 | $15.6B | $2.6B | $1.9B | $4.3B | $918.4M | $3.4B |
| FY2020 | $14.9B | $3.0B | $2.2B | $3.8B | $0 | $3.8B |
| FY2021 | $16.8B | $3.4B | $2.5B | $3.8B | — | — |
| FY2022 | $19.6B | $3.5B | $2.3B | $5.3B | — | — |
| FY2023 | $19.0B | $3.6B | $2.2B | $5.0B | $155.0M | $4.9B |
| FY2024 | $19.7B | $4.3B | $3.0B | $6.8B | $399.0M | $6.4B |
| FY2025 | $21.9B | $5.3B | $3.7B | $6.9B | $3.5B | $3.5B |

Latest trend (the newest full year against the year before; a reading, not a forecast):

- Revenue: +10.9% (year before +3.9%): accelerating
- Operating income: +23.6% (year before +21.0%): accelerating
- Net income: +24.2% (year before +34.5%): slowing
- Free cash flow: -45.5% (year before +31.9%): slowing

## Key insights

### Revenue grew more than twice as fast as fuel costs

Revenue rose 13.66% while fuel and purchased power rose 5.35%, so the growth came from what AEP earns on, not what it passes through.

Purchased electricity, fuel and other consumables were $2.09B against $1.98B a year earlier, up 5.35%. Revenue rose 13.66% to $6.83B from $6.01B. The fuel line fell to 30.55% of revenue from 33.0%, and operating margin widened to 26.5% from 25.3%. _(from the filing)_
Fuel and purchased power are normally recovered from customers at cost, with no markup. When revenue grows well ahead of that line, the extra revenue is mostly the part of the bill that recovers depreciation, operating costs and the allowed return on invested capital. Analysis: that is the higher-quality kind of utility revenue growth, because it tracks the regulated asset base rather than commodity prices. _(analysis)_
The caveat runs the other way too. A margin widened by a slower fuel line can narrow again if gas and coal prices rise, even with no change in the underlying return, because pass-through revenue inflates sales without adding profit. _(analysis)_

### Interest takes a steady third of operating profit

Interest expense of $606M was 33.4% of operating income, the same share as a year earlier, so lenders grew in step with profit.

Operating income rose 19.05% to $1.81B from $1.52B. Interest expense rose 19.06% to $606M from $509M. Measured against operating income, interest was 33.4% in both quarters, and 8.87% of revenue this quarter. _(from the filing)_
Analysis: the matching growth rates are what a debt-funded build looks like. New plants and lines enter the rate base and lift operating income, and the borrowing that paid for them lifts interest by about as much. The operating gain did not widen the share left for shareholders before tax; pretax income rose 17.89%, a little slower than operating income. _(analysis)_
The ratio is a useful gauge to follow. If the allowed return on new investment stays above the cost of the debt raised for it, the share holds; if borrowing costs rise faster than rates are reset, interest would take a larger slice. _(analysis)_

### A lower tax take pushed net profit past pretax growth

Tax fell to 9.5% of pretax income from 12.4%, so net income rose 21.8% while pretax income rose 17.89%.

Income tax expense fell 10.07% to $125M from $139M while income before tax rose to $1.32B from $1.12B. Tax took 9.5% of pretax income against 12.4% a year earlier. Net income rose 21.8% to $1.22B, ahead of pretax income's 17.89%. _(from the filing)_
Per share, part of that gain was shared with new holders. Earnings attributable to AEP common shareholders rose to $1.19B from $972M, while diluted shares rose to 550.1 million from 538.0 million, so diluted earnings per share went to $2.16 from $1.81. _(from the filing)_
The filing excerpt does not explain the lower tax take. Analysis: utilities often benefit from tax credits tied to their generation and from the regulatory treatment of deferred taxes, and these can vary between quarters, so this quarter's rate should not be read as a lasting level. _(analysis)_

### Operating profit nearly doubled since FY2018 on modest sales growth

Operating income in FY2025 was 1.98 times FY2018's while revenue rose only to $21.88B from $16.20B, lifting operating margin to 24.3% from 16.6%.

Operating income was $5.32B in FY2025 against $2.68B in FY2018. Revenue was $21.88B against $16.20B. Operating margin rose to 24.3% from 16.6%, and this quarter's was 26.5%. _(from the filing)_
Analysis: for a regulated utility, operating profit follows the capital it has invested and not yet depreciated, while revenue also carries fuel recovered at cost. A growing asset base raises profit, and the fuel portion of revenue does not, so margin climbs as the base grows. Depreciation and amortization, the recovery of that base, rose 16.61% this quarter to $1.03B, faster than revenue's 13.66%. _(analysis)_

### Competitive edge

- **Earnings that follow the investment base** Regulators set rates to recover costs plus a return on invested capital, so each completed plant or line raises the earnings base.
- **The largest cost passes through at cost** Fuel and purchased power were 30.55% of revenue, the biggest cost line, yet commodity swings move revenue far more than profit.
- **Even the largest utility brings only 17.7% of revenue** Ohio Power, the largest operating company, brought in 17.7% of revenue, so no one state regulator decides most of the outcome.

### What to watch

- **Debt and new shares fund the build** Interest rose 19.06% to $606M and diluted shares rose to 550.1 million, so capital costs arrive before all the new rates do.
- **A growing slice of earnings is construction income** Equity funds used during construction, non-cash income, were $81M, 6.8% of earnings to common shareholders against 6.1% a year earlier.
- **Other operating costs grew twice as fast as revenue** Other operation rose 28.82% to $1.03B against revenue's 13.66%, taking 15.05% of revenue, up 1.77 points on a year earlier.

## Investor view

**AEP's operating income grew 19.1%, faster than revenue, as fuel costs lagged and the regulated asset base kept growing**

### How it makes money

AEP sells electricity through regulated utilities. Vertically Integrated Utilities, which own generation as well as wires, brought in $3.92B of the quarter's $6.83B revenue, 57.4%. Transmission and Distribution Utilities, which deliver power that others generate, added $1.85B, 27.1%. Generation & Marketing, the competitive arm, added $922M, 13.5%. _(from the filing)_
The largest single cost is the energy itself: purchased electricity, fuel and other consumables were $2.09B, 30.55% of revenue. Depreciation and amortization of $1.03B and other operation of $1.03B each took about 15% of revenue. What remained as operating income, $1.81B, was a 26.5% operating margin. _(from the filing)_
By legal entity, the two largest utilities were Ohio Power, with $1.21B of revenue, and Appalachian Power, with $1.13B. The transmission holding company segment, AEPTHCo, reported $615M, 9.0% of consolidated revenue. _(from the filing)_
The model is a regulated return on invested capital. The utility builds plants and lines, regulators approve rates that recover its costs plus a return on the investment not yet depreciated, and earnings grow with that investment base rather than with sales volume alone. That is why depreciation and interest, not fuel, are the costs that move with the earnings. _(analysis)_

### What shifted

Revenue rose 13.66% to $6.83B from $6.01B. Generation & Marketing grew fastest, up 32.85% to $922M, and its share of revenue rose 1.95 points to 13.5%. Vertically Integrated Utilities grew 11.73% and Transmission and Distribution Utilities 10.3%, both slightly behind the total. _(from the filing)_
Costs grew more slowly than revenue: total expenses rose 11.83% against revenue's 13.66%. Fuel and purchased power rose only 5.35%, so their share of revenue fell 2.41 points to 30.55%. Operating margin widened 1.2 points to 26.5%, and operating income rose 19.05% to $1.81B from $1.52B. _(from the filing)_
The costs of a larger asset base rose faster than revenue. Depreciation and amortization rose 16.61% to $1.03B from $879M, interest expense 19.06% to $606M from $509M, and other operation 28.82% to $1.03B. The allowance for equity funds used during construction, income booked on capital still being built, rose 37.29% to $81M from $59M. _(from the filing)_
Income tax expense fell to $125M from $139M while pretax income rose to $1.32B from $1.12B, so tax took 9.5% of pretax income against 12.4% a year earlier. Net income rose 21.8% to $1.22B. Diluted earnings per share were $2.16 against $1.81, on 550.1 million diluted shares against 538.0 million. _(from the filing)_
In its earnings release the company said it signed 15 gigawatts of new load commitments during the quarter and raised its outlook for incremental contracted load through 2031, counting only projects backed by fully executed electric service agreements or letters of agreement. It also reported retail commercial sales volumes up 15.2% at its vertically integrated utilities and 18.0% at its transmission and distribution utilities. _(sourced)_

### Risks in the filing

The quarterly report adds no new risk factors. It states that "there have been no material changes to the risk factors previously disclosed" in the 2025 annual report, and it refers legal proceedings to the notes on commitments, guarantees and contingencies. _(from the filing)_
In the cautionary list attached to its earnings release, the company names the availability and cost of funds for its capital needs, especially when the lag in cost recovery is long and the costs are material, along with interest rate trends and rating agency actions that change the cost of its debt. _(sourced)_
It names demand risk directly. Projected data center demand is "subject to uncertainty and may not materialize as expected", and changing demand includes large-load contractual commitments. It adds that customer affordability considerations may affect regulatory recovery outcomes and future rate design. _(sourced)_
Execution and physical risks complete the list: construction delays from labor and parts shortages, including long lead times for large power transformers, wildfires and extreme weather, the recovery of fuel costs through rates, pending rate cases, and cybersecurity threats. _(sourced)_
Of these, financing is the risk the quarter's numbers already show. Interest expense grew as fast as operating income and depreciation grew faster than revenue: the cost side of a build cycle arriving before all of the new rates do. The demand risk is not yet visible in the income statement. It sits in the contracts and the plan, not in this period's revenue. _(analysis)_

## Founder view: mechanisms

### Earnings grow with the investment base

A regulated utility earns an allowed return on the capital it has invested and not yet depreciated. Rates are set to recover operating costs, depreciation, taxes and interest, plus that return. Growth comes from building more of the base, not from selling more of a fixed product at a higher price. _(analysis)_

### Construction earns before it serves

Regulators let a utility record a return on the equity tied up in projects under construction, the allowance for equity funds used during construction. It is non-cash income, recovered through rates once the asset is in service, and it keeps earnings from dipping during long builds. _(analysis)_

### Fuel is passed through, not earned on

Fuel and purchased power are usually recovered through adjustment clauses at cost: the utility collects what it spends without a markup. The line can swing with gas and coal prices without moving the regulated return much, so revenue moves more than profit does. _(analysis)_

### Signed load before capital, funded with debt and new shares

AEP's growth is now led by large customers, mostly data centers, signing take-or-pay service agreements before the generation and lines that serve them are built. The company counts load as contracted only when it is backed by fully executed agreements. The build is financed with debt and new shares, so the cost of capital lands before the contracted revenue does. _(source)_

## Member research

Signed-in members read, on the page: what American Electric Power's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- American Electric Power 10-Q for the period to 2026-09-30: https://www.sec.gov/Archives/edgar/data/4904/000000490426000072/ (2026-10-28)
- AEP Reports Third-Quarter 2026 Earnings, Expands Capital Plan and Increases Growth Outlook (Form 8-K, Exhibit 99.1): https://www.sec.gov/Archives/edgar/data/0000004904/000000490426000069/a3q20268kpressreleaseex991.htm (2026-10-28)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-02 · as of 2026-11-02