Ann Kelly
Executive Vice President and Chief Financial Officer at American Electric Power
Thank you, Julie and Darcy. It's great to be with you all this morning. Thanks for dialing in. I'll walk us through our fourth quarter and full year results, share some updates on our service territory load and our outlook for 2023 and finish with commentary on credit metrics and liquidity as well as some thoughts on our guidance, financial targets and portfolio management.
So let's go to slide 10, which shows the comparison of GAAP to operating earnings for the quarter and year-to-date periods. As Julie mentioned, we had strong operating results in both the fourth quarter and for the full year.
GAAP earnings for the fourth quarter were $0.75 per share compared to $1.07 per share in 2021. GAAP earnings for the year were $4.51 per share compared to $4.97 per share in 2021. For the quarter, I'll mention that we have reflected additional charges related to the expected sale of Kentucky Power and Kentucky Transco as non-operating costs. This is largely a result of the delay in the closing from the need to file a new 203 application with the FERC. There are detailed reconciliations of GAAP to operating earnings on pages 18 and 19 of the presentation today.
Today, I'm going to focus more on our full-year results, but I did want to provide a few highlights on the fourth quarter as we show on slide 11. Operating earnings for the fourth quarter totaled $1.05 per share compared to $0.98 per share in 2021. This is a $0.07 or 7% increase year-over-year.
While we had a lot of puts and takes, our vertically integrated and T&D utility segments continued to perform well, resulting from rate changes, transmission revenue and some favorable weather. We did see a $0.03 decline in our normalized retail margin, but that was due to a change in sales mix as load was favorable for the quarter. I'll discuss load in more detail in a couple of minutes.
We were also able to support an increase in our O&M expenses as a result of the strong earnings that we were seeing.
Transmission Holdco was favorable by $0.03, even after factoring in the loss the Ohio RTO adder as we continue to see the benefits of our investments. Generation & Marketing produced $0.16 per share, up $0.10 from last year, driven by increased retail energy margins and favorable generation performance, primarily driven by fewer average days year-over-year.
And finally, Corporate & Other was down $0.05 per share, driven by increased interest expense and investment losses, partially offset by favorable income taxes.
Now let's have a look at our year-to-date results on slide 12. Operating earnings for 2022 totaled $5.09 per share compared to $4.74 per share in 2021. This was an increase of $0.35 per share or 7%.
Looking at the drivers by segment. Operating earnings for vertically integrated utilities were $2.56 per share, up $0.30, due to rate changes across various operating companies, favorable weather, increased transmission revenue and also increased normalized load. Offsetting these favorable variances were higher O&M, increased depreciation expense and increased interest expense. Once again, the change in accounting around the Rockport Unit 2 lease results in $0.23 of favorable O&M, offset by $0.23 of unfavorable depreciation.
In the Transmission & Distribution Utilities segment, earned $1.16 per share, up $0.06 from last year. Favorable drivers in this segment included rate changes in Texas and Ohio, favorable weather and increased normalized retail load and transmission revenue. Offsetting these favorable items were unfavorable O&M and depreciation. With the favorable weather and other items that we experienced in 2022, we were able to responsibly deploy additional O&M in both utility segments to spend on items like increased vegetation management to improve system reliability.
The AEP Transmission Holdco segment contributed $1.32 per share, down $0.03 from last year. Favorable investment growth of $0.12 was more than offset by an unfavorable true-up of $0.04, the loss of the RTO adder in Ohio and the increased income taxes.
Remember, our 2022 guidance had this segment down by $0.08 year-over-year as a result of the investment growth being more than offset by the annual true-up and some unfavorable comparisons for taxes and interest.
Generation & Marketing produced $0.50 per share, up $0.24 from last year. The positive variance here is primarily due to the sale of renewable development sites, improved generation performance and land sales in the generation business, improved retail margins and increased wholesale margins stemming from favorable market conditions.
And finally, Corporate & Other was down $0.22 per share, driven by investment losses, unfavorable interest and increased O&M, partly offset by lower income taxes. The investment losses continue to be impacted by the year-over-year comparisons for our ChargePoint investment that we exited in the third quarter.
As we mentioned earlier, we are reaffirming our guidance range for 2023. For convenience, we've included an updated waterfall on our actual 2022 results to the midpoint of our guidance for 2023 on slide 36.
While the variances changed due to the 2022 actual results, there is no change to our 2023 segment or overall guidance. We are confident that our regulatory actions to provide timely returns on our distribution and renewable investments, continued investment in transmission assets, the impact of economic development efforts and prudent O&M management will offset headwinds such as rising interest rates and inflationary pressures.
Now turning to slide 13, I'll provide an update on our normalized load performance. Overall, 2022 was a remarkable year for normalized load growth across the AEP service territory. Despite the Federal Reserve's intentional actions to slow down the economy, AEP experienced its strongest weather-normalized load growth in over 15 years with 2.8% annual growth. The most impressive part is that this is experienced on top of a recovery year. As a reminder, 2021 was the strongest year for AEP's normalized growth in over a decade until 2022. The growth in 2022 was spread across nearly every operating company in every major retail class.
Starting in the lower right corner of the slide, normalized retail sales increased by 1.9% in the fourth quarter and ended the year up 2.8% compared to last year. For the quarter, the growth in commercial and industrial sales will more than offset the modest decline in residential sales. Looking forward, you will see that we are expecting growth of 0.7% in 2023. The story is changing somewhat the further we move away from the pandemic.
In 2022, the boost from fiscal policy overwhelmed the Federal Reserve's efforts to constrain the economy through monetary policy. In 2023, we expect the fiscal boost to abate given the congressional changes after the election, while the Fed's efforts to tame inflation remain in place. We expect this to result in a slight moderation of economic growth for the balance of this year.
Moving to the upper left corner, normalized residential sales decreased by 0.8% in the fourth quarter, but finished the year slightly above 2021. For the quarter, residential customer counts increased by 0.4%, but this was offset by a 1.2% decline in weather normalized usage. This is not surprising when you consider the impact that higher inflation, energy costs and interest rates have on customers' disposable income to end the year. You will notice that we now expect residential sales to decrease by 0.5% in 2023 for the same reason.
Moving right, weather-normalized commercial sales increased by 5.4% for the quarter and ended the year up 4.2% compared to 2021. The growth in commercial sales was spread across nearly every operating company. The fastest-growing commercial sector is professional, scientific and tech services that includes data centers, where load was up nearly 30% compared to last year for both the quarter and the year-to-date comparisons.
The outlook for 2023 is showing a modest 0.6% growth. While we do see momentum in this class driven by economic development, the sustained impact of the labor shortage, inflation, high interest rates and energy costs will act as a headwind in 2023.
Finally, focusing on the lower left corner, you see the industrial sales growth moderate in the fourth quarter, up 1.5%, and while the year ended 4.5% above 2021. Industrial sales increased at most operating companies and many of our largest sectors.
We continue to experience robust growth in the oil and gas sectors, which were up 6% compared to the fourth quarter of 2021. Outside of oil and gas, which tends to run countercyclical to the rest of the economy, we did notice softer industrial sales growth consistent with many of the economic indicators.
As you know, the ISM Manufacturing Index fell below 50 in the fourth quarter, which is a sign of an industrial contraction. The combination of sustained inflation, supply chain disruptions, increasing borrowing costs, a strong dollar and elevated energy costs have formed significant challenges for domestic manufacturing. Fortunately, AEP's past economic development activities are providing an offset and are keeping AEP's industrial sales growth in positive territory.
You see that the outlook is showing industrial sales growth of 2.1% in 2023, which is largely attributable to the consistent economic development activities from the past. I'll provide additional detail on the impact of these efforts in the next slide.
To summarize, the AEP service territory experienced a remarkable year for load growth in 2022 despite the inflationary pressures on wages and energy and a federal reserve that was intentionally trying to slow down the economy. We are finally seeing evidence that these measures are starting to have an impact, which will result in slower growth in 2023. Fortunately, AEP's disciplined commitment to economic development should keep our load growth in the black moving forward. For example, absent economic development, our loan growth would have been essentially flat in the fourth quarter and up 1.1% for the year.
Turning to slide 14, I want to highlight how our commitment to economic development is helping to sustain load growth even in the face of challenging economic conditions. The chart on this slide illustrates why the strategy is so important to us. The blue bars on this chart show the growth of gross regional product for the AEP service territory over the past year. You can see that it has been slowing over the period. And in fact, for the fourth quarter, growth in AEP's GRP was slightly negative compared to the fourth quarter of 2021. However, the green bars here show our industrial sales growth over the same period. You'll notice they have been resilient throughout 2022 without any help from GRP.
A lot of the growth in industrial load that we are seeing today is a consequence of economic development projects from previous years. And our focus on economic development is not just about the additional load that we report to you on a quarterly basis. We are also focused on attracting employers to the service territory. We know that adding new loading customers are a key strategy to providing value to all customers. This allows us to continue to prioritize investments that will improve the customer experience, while mitigating the rate impacts on our customer base.
By making this a key component of our strategy, AEP is helping to mitigate the impact of the economic downturns on our customers, communities and shareholders. And AEP's economic development team has a proven track record of helping to bring these new customers to our service territory with an emphasis on jobs and load. In fact, the AEP service territories added over 141,000 jobs in 2022.
Let's move on to slide 15 to discuss the company's capitalization and liquidity position. Taking a look at the upper left quadrant on this page, you see our FFO-to-debt metric stands at 13.2%, which is a decrease of 1.3% from the prior quarter. The primary reason for this decrease is the impact on both FFO and short-term debt from a decrease in our mark-to-market collateral positions associated with the decline in natural gas and power prices, as well as a continued increase in our deferred fuel balances.
We remain committed to our targeted FFO-to-debt range of 14% to 15%, and we plan to trend back into that range near the end of 2023 as we continue to work through the regulatory recovery process of our deferred fuel balances, which can drive some volatility in the metrics.
You can see our liquidity summary on the lower left quadrant of the side. Our five-year $4 billion bank revolver and two-year $1 billion revolving credit facility support our liquidity position, which remains strong at $2.6 billion. The $1.1 billion change from last quarter is mainly due to an increase in commercial paper outstanding for the reasons I mentioned earlier.
On a GAAP basis, our debt-to-capital ratio increased from the prior quarter by 1.5% to 62.9%.
On the qualified pension front, our funding status remained strong, ending the quarter at 102.4%. While assets performed as expected during the quarter, the primary driver for the funded status decrease was due to an increase in the liability caused by changes in actuarial assumptions influenced by the rising interest rate environment in 2022.
Now turning to slide 16. I'll give a quick recap of today's message. First, we are focused on execution. The Kentucky transaction is back in front of the FERC and Liberty and AEP are committed to moving forward with this transaction.
We just announced the agreement to sell our unregulated contract renewables portfolio and are working through the strategic review of the retail business. Each of these actions will help us to simplify and derisk our business.
Even as we work on these initiatives, we didn't take our eye off the ball in managing the business. We finished 2022 with solid earnings and made significant investments to support our customers even with the backdrop of supply chain challenges and inflationary pressures.
We continue to be committed to our long-term growth rate of 6% to 7%, continued dividend growth and a strong balance sheet while derisking the company, focusing on the customer and actively managing the portfolio.
We really appreciate your time and attention today. I'm going to ask Brad to open up the call, so that we can answer any questions that you may have.
