Earnings Call: Q4 2019

Feb 14, 2020

Good morning, everyone, and welcome to the Portland General Electric Company's 4th Quarter 2019 Earnings Results Conference Call. Today is Friday, February 14, 2020. This call is being recorded. And as such, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. For opening remarks, I would like to turn the conference call over to Portland General Electric's Director of Investor Relations and Treasury, Chris Little. Please go ahead, sir. Thank you, Jonathan. Good morning, everyone. I'm pleased you're able to join us today. Before we begin this morning, I'd like to remind you that we have prepared a presentation to supplement our discussion, which we'll be referencing throughout the call. The slides are available on our website at investors. Portlandgeneral.com. Referring to Slide 2, I would like to remind everyone that some of our remarks this morning will constitute forward looking statements. We caution you that such statements involve inherent risks and uncertainties and actual results may differ materially from our expectations. For a description of some of the factors that could cause actual results to differ materially, please refer to our earnings press release and our most recent periodic reports on Forms 10 ks and 10 Q, which are available on our website. Leading our discussion today are Maria Pope, President and CEO and Jim Lobdell, Senior Vice President of Finance, CFO and Treasurer. Following their prepared remarks, we will open the line for your questions. Now it's my pleasure to turn the call over to Maria. Thank you, Chris, and good morning, everyone. Welcome to Portland General Electric's 2019 earnings call. Today, I'll share an overview of our financial results, earnings growth expectations, a regulatory update on our integrated resource plan and a summary of what we're seeing in the Oregon legislative session. Jim will provide more detail on our financial results, our outlook on 2020, and then we will address your questions. Turning to Slide 4. In 2019, we recorded net income of $214,000,000 or $2.39 per diluted share compared with net income of $212,000,000 or $2.37 in 2018. We finished the 4th quarter earning $0.68 per diluted share compared with $0.55 in the Q4 of 2018. The increase in earnings per share was driven by improved gross margin due to strong industrial demand and higher earnings from ongoing investments in our system. The higher gross margin was partially offset by higher operating expenses, including vegetation management and wildfire mitigation, which Jim will later describe. Looking ahead, we're initiating 2020 full year earnings guidance of $2.50 to $2.65 per diluted share. To provide more clarity on future growth, we're moving the time period associated with our long term earnings guidance. We are now guiding to 4% to 6% earnings growth on average. In some years, as we experienced in 2019, our growth may be below this range or as indicated by our 2020 guidance, we may have growth above the range. On Slide 5, a few significant accomplishments this year include: the ongoing reduction of carbon emissions in our power supply portfolio with the construction of the Wheatridge Renewable Energy Fortman Coal Plant for closure. Both are on track and expected to be completed by the Q4 of this year. Additionally, in response to customers' overwhelming support of renewable energy, we launched our Green Future Impact program. 17 large municipal and corporate customers will receive energy from this facility, the largest solar project to be built in Oregon. This program complements our IRP plans for additional renewable procurement up to 150 average megawatts. We value the opportunity to partner with Avangrid and expect the facility to be operational in 2021. In 2019, we also continued investment in our system and focused on advancing communication network through our service territory and progressed on our previously announced integrated operations center, laying the groundwork for our smart grid initiatives. And finally, just yesterday, we received approval from the OPUC on our transportation electrification plan, which will enable further investment in electrification throughout our service territory. Turning to Slide 6. The economic conditions in our service area remain strong. In 2019, Oregon ranked 10th for the rate of in migration. This comes excuse me, when it comes to customer deliveries, a 6.7% increase in industrial deliveries was the major driver in 2019, offsetting downward pressure of energy efficiency on our residential and commercial deliveries. For 2020, we anticipate the deliveries to our current high-tech customers will again lead the way in our overall growth. Now I'd like to briefly touch on legislative matters. The 2020 legislative session began this month with renewed focus on regulating greenhouse gas emissions. We're supportive of legislation that accelerates our customers' interest to reduce carbon emissions, while not paying twice for the current renewable and clean energy trajectory that we are on. Additionally, we are supporting a few proposals to accelerate infrastructure investments, enabling a clean and modern transportation system. Turning to Slide 7. The regulatory process for our integrated resource plan continues to progress, and we expect a final decision from the commission in mid March or later. Regarding our Renewable Action Plan, we're focused on adding renewable resources of up to 150 average megawatts prior to the end of 2024. This reflects the recent extension of the federal production tax credit. In addition, we're targeting up to 600 megawatts of dispatchable capacity. We're currently engaged in bilateral contract negotiations with existing generators in the region to fill a portion of this need. As with past processes, we plan to initiate RFP design and independent evaluator selection discussions with parties with the RFPs to follow. And with that, thank you, and I'll hand it over to Jim. Thank you, Maria. Turning to Slide 8. I'll start by walking you through the earnings drivers for 2019. First, gross margin increased earnings by $0.26 due to a $0.12 increase associated with additional investments to better serve our customers, dollars 0.11 increase attributable to the net impact of decoupling as we experienced a decline in the average use per customer from our residential and commercial higher revenues due to increased industrial demand a $0.03 net increase attributable to weather, which consisted of a $0.07 increase due to unfavorable weather in 2018 and a $0.04 decrease due to unfavorable weather in 2019. 2nd, a $0.09 decrease in earnings attributable to higher operating expenses consisting of a $0.13 decrease primarily attributable to costs associated with vegetation management and wildlife mitigation efforts, a $0.05 decrease associated with IT and administrative and general expenses, primarily attributable to higher labor and employee benefits and a $0.09 increase due to a change in year over year bad debt reserves. In 2018, we had recognized a one time increase in bad debt reserves as a result of the customer information system implementation. A $0.04 decrease associated with Carty, which consists of the net effect of a $0.10 tailwind from the cash settlement in the Q3 of 2018, which we did not which did not reoccur and the $0.06 benefit from avoided carrying and litigation costs recognized in the first half of 2019. A $0.02 decrease from higher depreciation and amortization expense resulting from capital additions, a $0.07 decrease associated with lower PTCs as WEN underperformed for the year and a $0.02 decrease from other miscellaneous expenses. As we look ahead, each year, we evaluate our cost structure to ensure that we are providing safe and reliable service to our customers and to determine whether or not we will file for additional cost recovery. For a second consecutive year, we have seen opportunities to reduce costs and, as a result, have decided that we will not be filing a general rate case with the Oregon Public Utility Commission for a 2021 test year. We'll continue to reevaluate the need to file on an annual basis. Moving to Slide 9. As Maria mentioned, we're providing long term earnings guidance of 4% to 6%. In addition, we're initiating full year 2020 earnings guidance of $2.50 to $2.65 per diluted share, which assumes the following: an increase in retail deliveries between 0.5% to 1.5% weather adjusted. This forecast reflects an increase in nonresidential energy deliveries, driven primarily by high-tech manufacturing sector as well as increases in residential deliveries from a growth in customer count. Average hydro conditions for the year, wind generation for the year based on 5 years of historical levels or forecasted studies when historical data is not available normal thermal plant operations operating and maintenance costs between $590,000,000 $610,000,000 During the year, we'll begin the process of repurposing operating costs at our Boardman plant to offset inflationary increases elsewhere in the business, including costs associated with incremental vegetation management and wildfire mitigation, which we elevated during the Q2 of last year. This repurposing is in addition to other cost savings we have been able to achieve in the areas of field productivity, lower generating plant maintenance, IT and financing costs. Next on guidance assumptions, we expect depreciation and amortization expense between $415,000,000 $435,000,000 We're also forecasting for the year an effective tax rate between 15% to 20% and an average CWIP balance of $340,000,000 which includes Wheatridge and the integrated operating center. Finally, we expect cash from operations of $625,000,000 to $675,000,000 Onto Slide 10. As we look forward to 2020, we continue to maintain a solid balance sheet, including strong liquidity and investment grade credit ratings. We expect to fund estimated capital requirements with cash from operations and the issuance of debt securities up to $400,000,000 And now, operator, we're ready for questions. Our first question comes from the line of Julien Dumoulin from Bank of America. Your question please. Good morning, guys. This is actually Ryan Greenwald on for Julien. Thanks for taking our questions. Good morning, Ryan. Good morning. So just to clarify, did you say that you guys are removing the base year for the 4% to 6% EPS growth? We are keeping the base year for the 2018 through 2021, but we are signaling that on a forward going basis, we are trying to achieve a 4% to 6% on average. Got you. Helpful. And then on cost cuts and how you're kind of thinking about that, could you just provide a little more color into 2020 here given the lack of the rate case? Well, as I mentioned, we're looking across the organization. We have made great strides in the IT department in the field as far as our effectiveness, our ability to have full schedules associated with our crews. We are repurposing, as I've mentioned, the Boardman O and M dollars that will be no longer necessary as we move towards decommissioning of that plant. That will help us cover some of the other costs associated with inflationary challenges that we'll have as we move through the year. That's just a small sample of the things that we're working across the entire organization to better prove our efficiency. Got it. And then lastly, you guys aren't thinking about any equity issuances, right? No, no. An equity issuance would be tied to a major asset purchase or build. Otherwise, we don't see that necessary. Got it. Thanks guys. Thanks Ryan. Thank you. Our next question comes from the line of Brian Resto from Sidoti. Your question please. Hi, good morning. Hey, good morning, Brian. Good morning. Hey, could you just elaborate on your comment on repurposing Boardman costs? The Boardman plant is expected to retire at the end of 2020, so those cost savings would begin in 2021. Are you accelerating those savings into 2020 to manage O and M? Just a little more insight there. We have a little bit of trouble hearing you, Brian, but I got your question. On Boardman, Boardman is going to be going out towards the end of 2020. We've already started down the road of some decommissioning activities associated with it. We'll stop taking coal towards the Q4 of the year. And because of these activities that will allow us to repurpose some of the O and M dollars associated with that facility. We have been guiding for the Boardman ceasing coal fired operations for some time and have a really thoughtful glide path that we'll be pursuing for the balance of the year into next. Okay. Understood. And what was the PKAN balance at year end 2019? We were above the baseline by $5,000,000 We just water and wind were the challenge this year. Okay. And I know it's early on in the 2020 hydro season, but any early look on what you're seeing with your hydro facilities? The Mid Columbia is up this year. It's almost like a flip from last year. Last year, we saw that the in state hydro resources were higher than the Mid Columbia. Right now, it's the opposite. The Mid Columbia is up over closer to 100% and the end state is down. So we still have a lot more weather to go. We're only in the 1st part of February. And as we know, in Oregon, anything can happen between now and the end of March. Yes. I would emphasize Jim's caution. We're having very modest temperatures right now for a winter period of time, low precipitation. And so while the numbers appear to be good, we're very cautious for the balance of the year and particularly for hydro, but also for wind and for load. Okay. Thank you very much. Thanks, Brian. Thank you. Our next question comes from the line of Augustino Caliendo from Mizuho. Your question please. Hi guys. Good morning. Good morning. How are you? Great. Great. So just wanted to know or get a better sense about what would be the main drivers of just like the overall growth in terms of you guys being at the 4% or 6% growth rate? Well, the range is the 4% to 6%. Along with Wheatridge is on track. As we mentioned, the Boardman gives us an opportunity to repurpose some of the expenses there to help cover others. And then we've got other cost reductions along with the fact that we're seeing strong growth in the high-tech and digital services in our service territory. Perfect. Super clear. Great. That's it. All right. Thanks, Agustin. Bye bye. Thank you. Our next question comes from the line of Travis Miller from Morningstar. Your question please. Good morning. Thank you. Good morning, Travis. Good morning. I was wondering on the IRP timing, would that have any I'm suspecting not, but timing have anything to do with 2020 earnings or growth? And then when would any kind of impact from that IRP potentially impact that 4% to 6% growth? Sure. So the IRP process, first of all, we are hoping to get acknowledgment mid March. It could be later. And then we will pursue RFPs and selection of an independent evaluator and all of the processes with stakeholders that go along with that. On the Renewable side, we indicated that we could seek procurement as late as 2024 or in service as late as 2024 given the extension of the production tax credit. However, that window is between now and then, and we would hope to be able to move faster. Our customers, as indicated by our Green Future Impact products as well as others, are very interested in seeing us move faster with regards to non carbon resources. Does that suggest then more investment opportunities for you or more just power purchase agreements and such? So we take the lease cost, lease risk proposals that come our way. We work with an independent evaluator in determining that. And we'll have a fully transparent and open process as we move through this next year and into 2021. Yes. Right now, Travis, it's impossible to tell because it's we're going to look at everything that comes through the door. Okay. Okay. And then it's kind of a lot wrapped into this question. I was wondering if you could talk a little more about that Avangrid deal and kind of how that's going into this Green Future Impact program, the growth there? What does that mean for you guys on a financial side? And then also just the whole idea of getting to more renewable energy in the state. And there's a lot in there, but that Avangrid deal and the green future impact, I'd be interested in hearing more about. Sure. Well, first of all, this is an announcement that we made yesterday. It's 162 Megawatt project on a nameplate basis located in Gilliam County, Oregon, which is just east of the Dalles. The expected output is about 47 average megawatts. It's a traditional PPA, but will meet the needs through ourselves for some of our largest municipal and corporate customers, who wanted to go 100% green faster than our renewable portfolio standards. So in many ways, I sort of think of this as a top up program that will give them an opportunity to buy additional solar in addition to the 40% or wherever they want to be in that purchase program. And it varies customer by customer to enable them to be 100% green faster than our current trajectory. So we are very much looking forward to working with AvaGrid on this. It's something we've been working with customers for some time on. And there is also a second phase to the project as well that we will continue having discussions with Oregon Public Utility Commission and with others. Jim, do you want to go over any other details? Yes. The only other thing I'd add, Travis, as you think about this particular project in context of our IRP, that it does not change what we're asking for in our IRP in our action plan. No, I would say it's very important to stakeholders that this that anything that we do for specific customers that is above and beyond our RPS standards and what we're achieving through IRPs is incremental. Okay. Okay. And then do you have the percent of load, I guess, served by that green future impact? Any kind of thoughts on where that might be going? Is that an appropriate way to measure that green future impact? Yes. It's not going to have a material impact on our overall load. Okay. It's not a material share? Yes, 47 average megawatts. Out of an average of about 2,300. Yes, 2,300. I was talking about the whole program right now in terms of numbers of megawatts or hours. That's the program that we currently have with contracts that negotiated were in discussions with regards to next phases. And I think it would be too premature to speculate on that. We are seeing interest from some large digital and high-tech companies, which could make that larger, but we will have to take that on a sort of project by project or customer by customer basis. Okay, great. Thanks so much. Thanks Travis. Thank you. Our next question comes from the line of Sophie Karp from KeyBanc. Your question please. Good morning Sophie. Hi, good morning. How are you? Good morning. I was wondering if we could chat a little bit more about the comments on the IRP and it seems like you guys have a decent by contemporary standards load growth in the state. And so against that, we are seeing calls to delay some of the acquisitions of renewable assets. And granted this is longer term, maybe it's too early to talk about that, but how should we think about the cadence of your renewable procurement and the puts and takes on your kind of earnings going forward? So our integrated resource plan calls for up to an addition of about 150 average megawatts of renewables and 600 megawatts of capacity. We will go through the process as we have in the past. It will be fairly public. Looking at RFPs, looking looking at RFPs, looking at an independent evaluator, and we'll be doing that work through 2020 and hope to move expeditiously. In addition, we're already having some discussions with existing capacity providers. All of the capacity we're looking for is non emitting capacity at this point in time. And we will update you on future calls as we have information that will be material. Yes. Sophie, one other thing you need to keep in mind is that we're going to be following the stair steps associated with renewable portfolio standard, which says in 2025, it's 27% of our retail load needs to be served. By 2,030, it's 35, 45 in 2,035 and eventually 50% by 2,040. Got it. And then another question that I had, is there something that we should be watching with respect to legislative session in Oregon this year? How is that shaping up so far? Certainly. So we have had a fairly contentious legislative session and that would have followed from last year's pension. The issues really are around cap and trade. It's complex. It's changing all the time. It's a short session. And so the session will be finished in early March. We, as I noted in my remarks, are supportive of cap and trade legislation that supports our customers' interest in moving to a low carbon energy future, but also ensuring that customers do not pay twice since we're already bringing on current renewable projects, as we've discussed in the call, as well as the trajectory that Jim just outlined. Do you think we're going to see something done in this session? We are hopeful, but I would say that it's too early to call and anything can happen. But we remain very hopeful. Got it. Thank you. That's helpful, Amy. Thank you, Sophie. Thank you. Our next question is a follow-up from the line of Julien Dumoulin Smith from Bank of America. Is this you again, Ryan? Hey, you got no, it's Julien this time. Sorry, I just wanted to clarify the earlier response. What is the reasoning behind the pivoting in the growth rate? I just want to understand. I understand that the CapEx can be bulky at times and so therefore lumpy rather and so therefore it might not necessarily enable a smooth trajectory. I understand certain years you may or may not be filing a rate case, but I want to hear it from you guys So So let me let Jim address this. But first, please know that we are being responsive to investors' interest for more visibility, and we've heard your request for that. Jim? Yes. Julian, we've taken that limiter off of 2018 through 2021 and just saying on a long term basis, this is our objective. Again, as I had mentioned previously, we're looking at a strong economy in Oregon. We continue to have a lot of immigration into the state, continuing to have a lot of load growth in the high-tech sector out there. We actually had a paper company come back online in the service territory. We've got a lot of cost saving efforts that we've got going on inside the company that are really showing a lot of promise. And when you start adding all of these things up, I think we're really turning in the right direction. And that gave us a lot more confidence in putting out that type of guidance. Got it. So this is more about a post 'twenty one outlook than it is saying anything specific to any given year, right? Absolutely. Sometimes we'll be higher and sometimes we'll be lower. But this is where we're looking towards the long term future. Got it. And since we're talking about 'twenty one and the outlook through 'twenty one, I know we're talking about cost cuts in 'twenty and then 2021 on the subsequent question. I suspect that while you're not giving guidance per se that you still feel confident in being able to achieve that compounding growth rate off 2018 into 2021 given what you know today given your cost trajectory, your rate case decisions, etcetera, right? Yes. And please know that we're working across our company to be more efficient, effective, and to serve customers' needs as those accelerate not only for Green Energy, but for responsiveness and services that are commensurate with industries outside of the utility business. Excellent. All right. Thank you all very much. Appreciate the clarification. Thanks, Julien. Thank you. Our next question comes from the line of Vedula Murturi from Avon Capital. Your question, please. Good morning. Good morning, Vedula. Good morning. Okay. Not to beat a dead horse here, just so I understand kind of what we were just discussing with Julian. Is basically the idea that having set up the parameters for 2018 through 2021 that the 4% to 6% type of compound growth rate is now kind of being targeted like post 2021 as well going forward? Yes. Okay. Secondarily, you mentioned in one of your slides here about the 1Q approval of the transportation electrification plant. Can you give us a sense as to the potential capital dollars that would be that could be associated with that over say a reasonable planning period and whether and I doesn't I'm not sure that there's a whole lot associated with that, that would be in the CapEx plan currently? So that's a great question. And this was something that was just approved yesterday, and we're very pleased. It really focuses on physical infrastructure, customer service, supply energy management, our distribution operations and demand reliability management. As you know, this is an area that is very new and it's hard to forecast. We could see a need over the long term for upwards of 5,000 new charging ports as well as other infrastructure. But in the near term, we're probably looking at fairly modest growth, maybe ballpark, $100,000,000 over about a 5 year time period. So it's really around supporting the transformation of this sector. In Oregon, transportation is the largest emitter of greenhouse gases. And we already are working very closely with a number of partners, in particular, TriMet, which is one of the larger transit authorities in the country, is working very closely with us. There's some existing bus routes as well as converting over some of their bus depots. And we have a number of other partnerships with municipalities and others advancing charging infrastructure and working closely with them. Okay. And with the IRP then going to the RFP, when the request for proposals go out, at least my recollection in the past is that you have self build own options that you propose along with obviously 3rd parties that the independent evaluator will then assess. And in the past, I think you've indicated that there are structural disadvantages for you being the incumbent utility going to tax attributions and things of that nature that usually tend to favor the 3rd parties with regards to the ultimate selection at the end of the RFP. Is there anything that might be different this time or that could or anything unique that might be more advantageous to you this time? So it's just too early to tell. I think in your comment, there's just a lot of speculation in there. We'll go through an open and transparent process with the PUC. We'll work with an independent evaluator. And if we put in a bid, we will hope that it will be competitive. We have a good track record, but it's important that we add the lowest cost lease risk projects into our customers' portfolio. And just I think you answered this earlier, but when will the final outcome of the RFP and the actual selection be announced around the end of the year? Again, it's just too early to speculate on that. But thank you for your questions. Thank you. Thank you. This does conclude the question and for today's call. We invite you to join us in April for Portland General Electric's Q1 2020 results. Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.