Julie Sloat
Executive Vice President And Chief Financial Officer at American Electric Power
Thanks so much, Nick. Thanks, Darcy. And Nick, I love your Buckeye reference, Go Bucks. Yes, I love that. Thank you very much. A big game this weekend. Anyway, it's good to be with everybody. This morning, I'm going to walk us through the third quarter and year-to-date financial results, share some updates on our service territory load and finish with some commentary on financing plans, credit metrics and liquidity. Let's go to Slide six, which shows the comparison of GAAP to operating earnings for the quarter and year-to-date periods. GAAP earnings for the third quarter were $1.59 per share compared to $1.51 share in 2020. GAAP earnings through September were $3.90 per share compared to $3.56 per share in 2020. There's a reconciliation of GAAP to operating earnings on Pages 14 and 15 of the presentation today. Let's go to Slide seven, where we can talk about our quarterly operating earnings performance by segment. Operating earnings for the third quarter totaled $1.43 per share or $717 million compared to $1.47 per share or $728 million in 2020. Operating earnings from the vertically integrated utilities were $0.87 per share, up $0.02. Favorable drivers included rate changes across multiple jurisdictions, weather primarily in the west, transmission revenue and lower income tax. These items were offset somewhat by higher O&M expenses due in part to lower prior year O&M, which included actions we took to adjust to the pandemic and higher depreciation expense as well as lower normalized margins and lower AFUDC.
The Transmission & Distribution Utilities segment earned $0.31 per share, flat to last year. Favorable drivers in this segment included rate changes, transmission revenue and income taxes. Offsetting these favorable items were O&M expenses, again, a function of lower prior year O&M associated with pandemic-driven efforts, depreciation and property taxes. The AEP Transmission Holdco segment continued to grow, contributing $0.33 per share that was an improvement of $0.05, driven by the return on investment growth. Generation & Marketing produced $0.04 per share, down $0.09 from last year, influenced by the prior year land sales, lower retail volumes and margins, generation and income taxes. Finally, Corporate and Other was down $0.02 per share, driven by lower investment gains and unfavorable net interest expense. This was partially offset by lower income taxes. The lower investment gains are related to a pullback of some of the charge point related gains we've talked about in prior quarters. Let's have a look at our year-to-date results on Slide number eight. Operating earnings through September totaled $3.76 per share or $1.9 billion compared to $3.56 per share or $1.8 billion in 2020. Looking at the drivers by segment. Operating earnings for vertically integrated utilities were $1.87 per share, down $0.03 due to higher O&M and depreciation expenses. Other smaller decreases included lower normalized sales and wholesale load, higher other taxes and a prior period fuel adjustment.
Offsetting these unfavorable variances were rate changes across various operating companies and the impact of weather due to warmer-than-normal temps in the winter of 2020 and the summer 2021, which created a favorable year-over-year comp for us. Other favorable items in this segment included higher off-system sales, transmission revenue, net interest expense and income taxes. The Transmission & Distribution Utilities segment earned $0.85 per share, up $0.01 from last year. Earnings in this segment were up due to higher transmission revenue, rate changes, weather, normalized load and income taxes. Partially offsetting these favorable items were increased depreciation, O&M, other taxes and interest expenses. The AEP Transmission Holdco segment contributed $1.02 per share, up $0.27 from last year related to investment growth and favorable year-over-year true-up. Generation & Marketing produced $0.20 per share, down $0.11 from last year due to favorable onetime items in the prior year relating to an Oklaunion ARO adjustment in the sale of Conesville and reduced land sales in 2021. Higher energy margins and lower expenses in the generation business offset the unfavorable ERCOT market prices on the wholesale business during storm Uri in February. We also saw an unfavorable result in retail due to lower power and gas margins. Income taxes were also unfavorable. Finally, Corporate and Other was up $0.06 per share driven by investment gains and lower taxes and partially offset by higher O&M. Let me take a quick minute here to talk about the investment gain, which is predominantly a function of our direct and indirect investment charge point.
As you'll see on the waterfall, this produced a $0.06 benefit year-to-date in 2021 as compared to the corresponding 2020 period. You may recall that in the fourth quarter and full year 2020, this investment produced $0.05 contribution, and we would expect the year-over-year advantage to be more pronounced at this point in 2021 as we have no benefit during the same period in 2020. Turning to Page nine. I'll update you on our normalized load performance for the quarter. Before we get into the specifics, let me start by reminding everyone that everything you see on this slide is showing year-over-year growth. That means these numbers can be influenced by what was going on last year or what is happening now in 2021. Given all that occurred in the economy last year, it's obvious that these growth rates are at least partially being influenced by the comparison basis. This leads to the natural follow-up question like how does today's load compared to pre-pandemic level? And I'll get to that question on the next slide. But before I do, let's take a look at what our normalized load growth was for the quarter. Starting in the upper left corner, normalized residential sales were down 1.6% compared to last year, bringing the year-to-date decline down to 9/10th of a percent. You'll notice that last year, residential sales were up 3.8% in the third quarter when the economy was just starting to reopen.
One year later, they are down only 1.6%, which suggests there's been a shift up in residential sales as more businesses have embraced a remote workforce for jobs that can be performed at home. The last item to point out on the residential chart is that you'll notice that we added a new bar to the right showing our latest projection for 2021 based on the load forecast update. The original guidance assumed residential sales would decrease by 1.1% in 2021. The latest update shows an improvement as we now expect residential to end the year down 9/10th of a percent. Moving right, weather-normalized commercial sales increased by 5%, bringing the year-to-date growth up to 4.3%. Last year's third quarter commercial sales were down 4.6%. So again, we're seeing a net positive story as the commercial sales class is bouncing back faster than expected. And while we're seeing a strong bounce back in the sectors most impacted by the pandemic, such as schools, churches and hotels, we're actually seeing the strongest growth in commercial sales this year from growth in data centers, especially in Central Ohio.
To give you some perspective, last year, this sector was the 9th largest commercial sector across the AEP system. Today, it's the 6th largest and will likely move further up in the rankings as more data center loads are expected to come in online over the next several years. You'll also notice that our latest load forecast update now suggests that commercial sales will end the year up 3.7% as opposed to the 0.5% decline assumed in the original guidance forecast. The economy has recovered much faster than originally assumed, which is one of the reasons why we've updated the forecast and showing you an improvement in that regard. In the lower left corner, you'll see that industrial sales also had a very strong quarter. Industrial sales for the quarter increased by 7%, bringing the year-to-date up to 4.2%. Industrial sales were up at every operating company in nearly every sector. I'll point out, however, that the 7% growth in the third quarter this year did not quite offset the 7.8% decline experienced last year, which means we still have a little more room to grow before the industrial class fully recovers from the pandemic recession. The good news is we have a lot of momentum to work with. You'll notice that the latest load update now projects industrial sales will end the year up 4.3%, which is 2.4% higher than assumed in the original guidance forecast. Finally, when you put it all together, in the lower right corner, you'll see that normalized retail sales increased by 3% for the quarter and were up 2.3% for the first nine months.
By all indications, the recovery from the pandemic and recession is happening faster than expected and our service territory is positioned to benefit from future economic growth. You'll recall that the original guidance forecast assumed normalized low growth of 2/10th of a percent in 2021. Based on our latest update, we're now expecting to end the year up 2.2%, which is a supporting factor in narrowing our earnings guidance range and raising the midpoint for 2021. Turning to Slide 10. I want to answer the question from earlier to ask how our current low performance compares to pre-pandemic levels. This bar chart is designed to answer that question. The blue bars are the same year-to-date bars that we shared on the prior page. As a reminder, these represent growth versus 2020, which was influenced by the restrictions implemented to manage the public health crisis. The orange bars here show how the year-to-date sales in 2021 compare to 2019, which was the most recent pre-pandemic year for comparison. These bars tell us how close we are to a full recovery from the pandemic. Starting at the left, you'll notice that our reported residential sales are down 9/10th of a percent compared to last year, but they're actually up 1.6% compared to our pre-pandemic levels. This is a gauge for how our customers' behaviors have changed since the pandemic with more people working from home. The next bar shows that while commercial sales are up 4.3% compared to last year, they are still 8/10th of a percent below the pre-pandemic levels. Given the recent growth we're seeing, especially in the data center loads, we would expect commercial sales -- the commercial sales class to fully recover very soon.
Moving further right, you'll notice that while the industrial sales are up 4.2% compared to last year, they are still 3% lower than pre-pandemic levels. Given some of the headwinds from manufacturing today with supply chain disruptions, labor shortages, etc., it may take a little longer before the industrial class fully recovers from the pandemic recession, but we do expect to eclipse the pre-pandemic levels in 2022. In total, our normalized load is up 2.3% compared to last year and is now within 7/10th of a percent of being fully recovered from the pandemic. So it's safe to say that we're pleased with the strength and balance of this recovery in the AEP system. Let's check on the company's capitalization and liquidity on Page 11. On a GAAP basis, our debt-to-capital ratio decreased 0.4% from the prior quarter to 62.2%. When adjusted for the storm Uri event, the ratio is slightly lower than it was at year-end 2022 -- or sorry, 2020 and now stands at 61.5%. Let's talk about our FFO to debt metric as in the first and second quarter, the effect of storm Uri continues to have a temporary and noticeable impact on this 2021 metric. Taking a look at the upper right quadrant on this page, you'll see our FFO to debt metric based on traditional Moody's and GAAP-calculated basis as well as on an adjusted Moody's and GAAP-calculated basis. On a traditional unadjusted basis, our FFO to debt ratio increased by 0.9% during the quarter to 10.2% on a Moody's basis. And just again, reiterating rating agencies continue to take the anticipated recovery into consideration as it relates to our credit ratings.
So very important to note that. On an adjusted basis, the Moody's FFO to debt metric is 13.6%. This figure removes or adjusts the calculation to eliminate the impact of approximately $1.2 billion of cash outflows associated with covering the unplanned Uri-driven fuel and purchase power in the SPP region directly impacting PSO and SWEPCO in particular. The metric is also adjusted to remove the effect of the associated debt we used to fund the unplanned payments. This should give you a sense of where we would be from a business-as-usual perspective with that 13.6%. Importantly, as Nick mentioned, the recovery of the Uri-driven fuel and purchase power expense in the PSO and SWEPCO jurisdictions is well underway, and we're making progress. As a result, and consistent with what we have previously communicated, we still anticipate our cash flow metrics to return low to mid-teens target range next year. Obviously, we're trying to push towards the mid-teens range, but that will take us a little while longer, but we're definitely on our way there. And as you know, we'll keep you posted on our progress. Before we leave the balance sheet topic, I do want to make note of the intended change to our 2022 financing plan in light of our announced sale of Kentucky Power and Kentucky Transco. You may recall that we had planned to issue $1.4 billion of equity in 2022. That's inclusive of our $100 million dividend reinvestment plan to fund our growth capex program.
While we will provide our typical three-year forward annual review of our cash flows and financial metrics at the upcoming EEI conference, what we can expect to see that the 2022 forecast will be adjusted to eliminate the previously planned $1.4 billion of equity financing that I just mentioned with any residual proceeds being used to reduce a small portion of the 2022 debt financing that we had planned. These actions will have no impact on our previously stated credit metric targets or messaging in regard. In the slide deck today on Page 39, you'll see our current cash flow forecast with which you're already familiar. We've included a note on the slide to reflect the fact that the numbers have not been updated for the announced Kentucky transaction, along with the red circle around the 2022 financing -- equity financing amount that will be changed and updated when we roll out the new view in a couple of weeks in conjunction with the EEI conference. So while we're talking about the Kentucky transaction, I can also share that we expect that the sale will be $0.01 to $0.02 accretive in 2022, and we'll reflect this in our 2022 earnings guidance that we provide to you at the EEI conference. Okay. So back to our regularly scheduled earnings call programming and commentary. Let's take a quick moment to visit our liquidity summary on the lower right side of Slide 11. Our five-year $4 billion bank revolver and two-year $1 billion revolving credit facility, along with proceeds from a quarter-end debt issuance to support our liquidity position, which remains really strong at $5.1 billion. If you look at the lower left side of the page, you'll see that our qualified pension continues to be well funded at 104%. Additionally, our OPEB is funded at 173.9%.
Let's go to Slide 12, and I'll do a quick wrap up and we can get to your questions. Our performance through the first three quarters of this year give us confidence to narrow our operating guidance to the upper half of our current range, resulting in a new range of $4.65 per share to $4.75 per share with a midpoint of $4.70 per share. As we've stated, we are committed to our long-term growth rate target of 5% to 7%. Today's 2021 earnings guidance revision is yet another demonstration of our drive to deliver performance in the upper half of our guidance range. From a strategic perspective, we are making significant progress in addressing items that are top of mind for our current and prospective investors. We are now in contract to sell Kentucky Power and Kentucky Transco, which we expect to complete in the second quarter of 2022. This transaction enables us to avoid the $1.4 billion equity issuance that was part of our original forecast we had shared with you for 2022 and therefore, alleviates the overhang, the equity overhang and also allows us to deliver a transactions that we estimate to be $0.01 to $0.02 accretive in 2022. Furthermore, we're able to do this while concurrently preserving our ability to get our FFO to debt metrics comfortably into that mid- to low teens range by 2022, which is commensurate with a Moody's Baa2 stable rating.
As you know, we continue to target that. The intention is to remain in this credit metric range, again, with the preference to try to get closer to that midpoint as we move along in time. All of this positions us to continue our generation transformation, which is underpinned by the renewable investment opportunity we've shared with you and complemented by our ongoing energy delivery investment. So here's what you can expect to see from us at the upcoming EEI conference in early November. In addition to the updated three-year forward cash flow and financing plan, we'll be introducing and sharing the details behind our 2022 earnings guidance and our longer-term capital plan, we typically go out five years, all of which will incorporate the effects of the announced Kentucky sale. So with that, sure, we do appreciate your time and attention.
And I'm going to turn it over to the operator so we can get to your questions.
