Julie Sloat
Executive Vice President and Chief Financial Officer at American Electric Power
Thanks, Nick. Thanks, Darcy. It's good to be with everyone this morning. Good morning, and thanks for dialing in. I'm going to walk us through our second quarter and year-to-date results, share some updates on our service territory load and finish with commentary on our credit metrics and liquidity as well as some thoughts on our guidance, financial targets and then recap our current portfolio management activities underway. So let's go to Slide 10, which shows the comparison of GAAP to operating earnings. GAAP earnings for the second quarter were $1.02 per share compared to $1.16 per share in 2021. GAAP earnings through June were $2.43 per share compared to $2.31 per share in 2021. There's a detailed reconciliation of GAAP to operating earnings on Pages 18 and 19 of the presentation today, but I'd like to call out three of the reconciling items that do not affect operating earnings, but relate to our asset optimization activities underway. Specifically, you'll see that we made an adjustment to arrive at our operating for the quarter and year-to-date periods, consisting of Kentucky sale costs and the write-off of one of the unregulated universal scale wind projects that's included in the portfolio. We're in the process of preparing for sale. The Kentucky sale charge reflects an anticipated reduction in the sales price as we work with Liberty to accommodate adjustments for costs that have been identified through the regulatory approvals that we've received. Turning to the renewable investment write-off, the Flat Ridge two projects specifically has continued to see deteriorating performance due to equipment issues and transmission congestions to avoid an otherwise necessary repowering investment to address the performance issues and complicate our portfolio sales process, we elected to write off the equity investment and are in discussions with an interested party for the sale of ownership interest in Flat Ridge 2.
Consequently, this will remove the Flat Ridge two project from the portfolio, we're preparing for auction, which should help improve the valuation opportunity as investors engage in the sales process, which is scheduled to launch no later than early September. Lastly, I'll mention that we monetize some mineral rights, which give rise to a benefit to GAAP, but non-operating earnings, which helps offset the charges I just mentioned. So while I would typically not spend time walking through the GAAP to operating earning reconciliation. I thought it was appropriate at this time given the milestones we're clearing on the asset optimization front. And while these charges and gains are things that we need to recognize, they are entirely driven by our efforts to derisk, simplify and bring cash in the door to support our continued investment in the regulated business. So with that, let's go to Slide #11 and walk through our quarterly operating earnings performance. Operating earnings for the second quarter totaled $1.20 per share or $618 million compared to $1.18 million per share or $590 million in 2021. Operating earnings for vertically integrated utilities were $0.59 per share, up $0.14. Favorable drivers included rate changes across multiple jurisdictions, positive weather, primarily in our western jurisdictions, increased transmission revenue and normalized retail load and income taxes. These items were somewhat offset by increased depreciation in O&M and lower off-system sales.
This is a reminder on the O&M and depreciation front. As I mentioned on the first quarter call and included in our 2022 guidance details because of a change in accounting related to the Rockport Unit two lease at I&M, we're seeing approximately $0.05 of favorable O&M offset by $0.05 of unfavorable depreciation in each quarter of 2022, but no consequential earnings impact. And so I'll have a little more to share on loan performance, and I'll get to that in a minute here. So just hang with me. The Transmission and Distribution Utilities segment earned $0.32 per share, up $0.01 compared to last year. Favorable drivers in this segment included rate changes, load, positive weather in Texas and Ohio and increased transmission revenue. Offsetting these favorable items were unfavorable O&M in depreciation. The AEP Transmission Holdco segment contributed $0.27 per share, down $0.07 compared to last year, favorable investment growth of $0.03 was more than offset by an unfavorable true-up of $0.07. As I mentioned last quarter, this is consistent with our guidance. Our 2022 guidance had this segment down by $0.08 in year-over-year as a result of the $0.12 of investment growth being more than offset by the annual true-up that occurred this quarter and some favorable on comparisons on the tax and financing side. This segment continues to be an important part of our 6% to 7% EPS growth, as you well know. Generation and Marketing produced $0.18 per share, up $0.09 from last year. The positive variance is primarily due to the sale of renewable development sites as well as increased generation margins and land sales. Finally, Corporate and Other was down $0.15 per share, driven by lower investment gains, increased income taxes and unfavorable interest.
The lower investment gains are largely related to charge point gains that we had in the second quarter of 2021 that have reversed this year. The increased income taxes are related to the reduction of a consolidating tax adjustment at the parent. Let's turn to Slide 12 and our year-to-date operating earnings performance. Year-to-date operating earnings totaled $2.42 per share or $1.234 billion compared to $2.33 per share or $1.160 billion in 2021. Operating earnings for the vertically integrated utilities were $1.18 per share, up $0.18. Similar to the quarter, favorable drivers included rate changes across multiple jurisdictions, positive weather, mainly in our western jurisdictions, increased transmission revenue and normalized retail load and income taxes. These items were somewhat offset by increased depreciation and lower off-system sales. Once again, the change in accounting around the Rockport Unit two lease results in $0.11 of favorable O&M offset by $0.11 of favorable -- unfavorable depreciation. The Transmission & Distribution Utilities segment earned $0.62 per share, up $0.08 compared to last year. Favorable drivers in this segment included rate changes in Texas and Ohio and increased normalized retail load and transmission revenue. Offsetting these favorable items were unfavorable O&M and depreciation. The AEP Transmission Holdco segment contributed $0.62 per share, down $0.06 compared to last year. Favorable investment growth of $0.05 was more than offset by unfavorable true-up of $0.07 and increased property taxes. The Generation & Marketing segment produced $0.21 per share, up $0.05 from last year. The positive variance is primarily due to the sale of renewable development sites and increased wholesale margins, offset by lower retail margins. Finally, Corporate and Other was down $0.16 per share, driven by lower investment gains, unfavorable interest and increased O&M.
The lower investment gains, again, are largely related to charge point gains that we had in 2021 that have reversed this year. Turning to Slide 13. I'm going to provide an update on our normalized load and performance for the quarter. And in general sense, the AEP service territory has made significant momentum despite the well-publicized headwinds impacting the macro economy. Starting in the upper left corner, normalized residential sales increased by 1.2% in the second quarter and were up 1% year-to-date compared to 2021. This growth was comprised of growth in both customer counts and weather-normalized usage for both comparisons. While the results were mixed by operating company, the strongest residential growth was in the AEP Texas service territory, which consistently has the strongest customer growth across the AEP system due to favorable demographics. Moving to the right. Weather normalized commercial sales were up 4.1% compared to last year for both the quarter and year-to-date comparison. This consistent growth in 2022 is spread throughout the service territory. The growth in the commercial sales segment was spread across every operating company and nine of our 10 commercial sectors, the only top commercial sector that is down versus last year's hospitals, which makes sense given that hospitalizations have dropped since early in the pandemic. On the flip side, the fastest-growing commercial sector is data centers were loaded up 32% compared to last year. Finally, focusing on the lower left corner you see that industrial sales posted another strong quarter, up 5% for the quarter and up 5.3% year-to-date compared to last year. Industrial sales were up at every operating company in most of our largest sectors. We experienced double-digit growth in a number of key industries this quarter, including chemicals, manufacturing and oil and gas extraction.
We also saw robust growth in primary metals manufacturing, paper manufacturing, petroleum products and coal mining. To summarize, we've experienced broad-based growth throughout the service territory on top of a recovery year. Every operating company has increased its sales in 2022 compared to last year. Growth is also consistent across every major retail class and most of the top commercial and industrial sectors served by AEP. We know the headlines are full of messages about a pending recession, but our sales statistics through the first half of the year show our service territory is still firmly in the expansion phase of the business cycle. We're mindful of the difficult monetary policy, decisions being contemplated by the Federal Reserve to address inflationary pressures in the economy and recognize some of these decisions could impact our customers' growth opportunities going forward. But so far, we're seeing little evidence that has dampened the economic activity within our footprint through the first two quarters of this year. Moving to Slide 14. I want to provide additional context to the load we experience -- we've experienced so far in 2022 and how it compares to our pre-pandemic sales levels. Starting with the chart on the left, the bars show how the second quarter sales compared to the pre-pandemic baseline in the second quarter of 2019. You'll notice that the total retail sales are 3.6% above pre-pandemic levels. Furthermore, every class is showing higher sales than before the pandemic began. This means that every class is fully recovered and is in the expansion phase of the business cycle. The chart on the right shows the same comparisons for the year-to-date period. You'll notice that while the numbers are slightly different, the message is the same. Through June, AEP's normalized sales are 2% above the pre-pandemic levels. And just like the quarter, every class has exceeded pre-pandemic levels on a year-to-date basis. Last year's strong growth numbers were expected, considering it was a recovery year from the pandemic shutdowns.
This year's growth is perhaps even more impressive considering the growth as compared to a strong recovery year. We'll continue to monitor the economy and its impact on our load over the summer months, and we'll provide the results of our updated load forecast this fall. So let's move on to Slide 15 to discuss the company's capitalization and liquidity position. On a GAAP basis, our debt-to-capital ratio decreased 0.1% from the prior quarter to 61.4%. Taking a look at the upper right quadrant on this page, you'll see that our FFO to debt metric stands at 13.4% on a Moody's basis and 13.3% on a GAAP basis which is a decrease of 0.3% and 0.4%, respectively, from the prior quarter. The slight decrease can be attributed to an increase in deferred fuel balances as well as a slight increase in balance sheet debt. As we stated on our last earnings call, we anticipate trending toward our targeted FFO to debt range of 14% to 15% as the year progresses. You can see our liquidity summary on the lower right of the slide, our 5-year $4 billion bank revolver and our 2-year $1 billion revolving credit facility support our liquidity position, which remains strong at $4.7 billion. On the qualified pension front, while our funding status decreased 0.8% during the quarter, it remains comfortably strong at 105.6%. Negative returns on risk seeking and fixed income assets during the quarter were the primary drivers of the funding's status decrease. However, rising interest rates caused plan liabilities to decrease, which provided a favorable offset to the negative asset returns. So let's go to Slide 16 for a quick recap of today's message. The second quarter has provided a solid foundation for the rest of 2022, and we are reaffirming our operating earnings guidance range of $4.87 to $5.07. We continue to be committed to our long-term growth rate of 6% to 7%. We continue to work through the Kentucky Power sale to Liberty and are on track for a closing later this summer, and we'll be launching the auction process for our unregulated contracted renewables business no later than early September. So before I invite -- hand this over to the operator, I'd like to mention one thing. We had previously announced that we would be having an investor conference this year, and we've set a date for that. As Nick mentioned, we'll be hosting at our investor conference in New York City on October 4. So we really do appreciate your time and attention today.
With that, I'm going to ask the operator to open the call so we can hear what's on your mind and take any questions that you have.
