Earnings Call: Q4 2018

Feb 15, 2019

Good morning, everyone, and welcome to Portland General Electric Company's 4th Quarter 2018 Earnings Results Conference Call. Today is Friday, February 15, 2019. 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. Director of Investor Relations and Treasury, Chris Little. Please go ahead, sir. Thank you, Chelsea. Good morning, everyone. I'm pleased that you're able to join us today. Before we begin our discussion 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'd like to make our customary statements regarding Portland General Electric's written and oral disclosures. There will be statements on this call that are not based on historical fact and as such constitute forward looking statements under current law. These statements are subject to factors that may cause actual results to differ materially from forward statements made today. For a description of some of the factors that may occur, could cause such differences, the company requests that you read our most recent Form 10 ks. Portland General Electric's 4th quarter and full year 2018 earnings were released via our earnings press release and Form 10 ks before the market opened today, both of which are available on our website. The company undertakes no obligation to update publicly any forward looking statements, whether as a result of new information, future events or otherwise. The Safe Harbor statement should be incorporated as part of any transcript of this call. 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 lines for your questions. Now it's my pleasure to turn the call over to Maria. Thanks, Chris, and good morning, everyone, and thank you for joining us today. Welcome to Portland General Electric's 2018 earnings call. I'm pleased to share our financial results and accomplishments. We will also discuss earnings guidance as well as the Wheatridge Renewable Energy Facility, the winning bid from our renewable RFP process. We're excited about the combination of wind, solar and battery storage, a first in its scale and cost competitive in delivering carbon free energy to customers. Turning to Slide 4. Our full year 2018 financial results of $2.37 per diluted share were near the top end of our guidance as well as ahead of last year. We're initiating 2 excuse me, we're initiating 2019 full year earnings guidance of $2.35 to $2.50 per diluted share as well as providing long term earnings growth guidance of 4% to 6%. Jim will provide the details on each later on the call. Turning to Slide 5. Our service area continues to grow. Our average number of customers grew by 1.3% this year, and total retail energies increased 0.4% from 2017 on a weather adjusted basis. Strong industrial growth of 2.2% more than offset the impact of residential and commercial energy efficiency. Our service area remains attractive to large scale commercial and industrial development, especially from data centers and high-tech manufacturing. Furthermore, Oregon continues to see strong in migration and an average unemployment rate of 3.5%. In 2018, our accomplishments include advancing smart grid technologies such as our distributed energy resource test beds and laying the groundwork with electric avenues and working with our transit authorities to expand transportation electrification. We also achieved positive outcomes on our 2019 general rate case and successfully resolved the Carty litigation, receiving $130,000,000 in cash settlement proceeds. Turning to Slide 6. After months of regulatory competitive bidding processes, we're proud to announce our collaboration with NextEra Energy Resources, who will construct a facility that combines 300 megawatts of wind generation, 50 megawatts of solar generation and 30 megawatts of battery storage. This project will be the nation's 1st major energy facility to co locate and integrate these technologies at scale. We will own 100 megawatts of the project and will buy the balance of the facility's output under a 30 year power purchase agreement with a year 12 purchase option. The wind component will be operational by December 2020 and will qualify for 100 percent federal production tax credits. The solar and battery components will be completed in 2021 and will qualify for 100 percent of the federal investment tax credits. As such, the overall delivered cost of energy is highly competitive, making the project extremely attractive as we work to lower our carbon impact while maintaining reliability and keeping customer prices affordable. PGE expects to invest approximately $160,000,000 for its owned portion of the project, and this amount is included in our updated capital expenditure forecast. In addition, we are advancing our green tariff in order to sell 100% renewable energy to our largest commercial and municipal customers. The tariff filing has been supported by several prominent mayors, and we expect regulatory review to be complete this quarter. We also plan to file our 2019 Integrated Resource Plan this summer. The plan will outline our long term resource needs and is a key part of our efforts to pursue safe, reliable and affordable energy. We look forward to continued collaboration with stakeholders. And now I'm pleased to turn the call over to Jim. Thank you. Thank you, Maria. Turning to Slide 7. In December, the OQC adopted all stipulations and resolved the remaining contested issues in our 2019 general rate case, approving a revenue increase of approximately $9,000,000 that took effect January 1, 2019. This included a rate base of 4 point $75,000,000,000 up from our previously authorized rate base of $4,500,000,000 while maintaining our 50% equity capital structure and return on equity of 9.5%. The commission also authorized an increase to our annual amount of recovery for storm restoration, incorporation of recent weather trends into our load forecast and extended decoupling through 2022. After evaluating our financial projections, we have determined that we will not file a general rate case for 2020 with the OPUC and we'll continue to reevaluate the need to file on an annual basis. Turning to Slide 8, which shows earnings drivers for 2018. First, gross margin reduced earnings by 0 point a $0.31 decrease attributable to mild weather in 2018 when compared to 2017. And that was offset by $0.12 attributable to lower purchase power and fuel costs as well as increased wholesale revenues. 2nd, lower storm restoration costs represent a $0.09 increase in earnings. Next, lower plant maintenance expense contributed to an $0.08 increase in earnings, followed by Carty adding approximately $0.11 from the cash settlement. Regulatory items including tax reform and capital deferral dockets contributed to an increase of 0 point 1 dollars And finally, a decrease of $0.02 per share due to other miscellaneous items. On Slide 9, we've provided a summary of the company's current capital expenditure forecast from 2019 through 2023 related to investments that support our combined customer growth and development of a more efficient, reliable and secure system. Included in this forecast are capital expenditures for the Wheatridge Renewable Energy Facility, most of which will be in 2020. On to Slide 10, we continue to maintain a solid balance sheet, including strong liquidity and investment grade credit ratings. As of December 31, 2018, we had 1st mortgage bond issuance capacity of 1,000,000,000 dollars cash available short term credit and letter of credit capacity totaling $755,000,000 and a common equity ratio of 49.8%. In January of 2019, we executed an amendment to a revolving credit facility of $500,000,000 extending the termination date to November of 2022. In December, we issued $75,000,000 of first mortgage bonds at an interest rate of 4.47% that will mature in 2,048. In 2019, we expect to fund estimated capital expenditures with cash from operations, the issuance of debt securities up to 375,000,000 dollars In April, we issued $200,000,000 of 1st mortgage bond securities at an interest rate of 4.3%, maturing in 20.49. As shown on Slide 11, we're initiating full year 2019 guidance of $2.35 to 2 point approximately 0.5% weather adjusted, average hydro conditions for the year, wind generation for the year based on 5 years of historical levels or forecast studies when historical data is not available normal thermal plant operations operating and maintenance costs between 5.85 dollars and $605,000,000 and depreciation and amortization between $400,000,000 420,000,000 dollars In 2019, we are forecasting an effective tax rate between 10% to 15%, which will be slightly higher than in 2018 due to fewer production tax credits and higher pretax book income. We're also forecasting an average CWIP balance of $250,000,000 Because we are not filing a 2020 general rate case, we wanted to be able to provide you with some additional guidance around earnings of the company. Therefore, we're providing earnings guidance of 4% to 6% earnings per share growth rate on average for the period 2018 through 2021. We will get there through a combination of 3 factors. 1st, continued investments in our system driving efficiencies in our cost structure. For example, investments in our distribution system including substation upgrades and replacement of underground cables prior to failures avoid the cost of break fixes. 2nd, strong economics in our service territory, which drive both investment and growth in demand help to offset operational costs and third, investments in renewable and energy storage, including the Wheatridge Renewable Energy Facility and our pilot energy storage projects. And now, operator, we're ready for Thank you. And our first question will come from the line of Insoo Kim with Goldman Sachs. Your line is open. Hi, good morning everyone. Good morning. Just a question on the, I guess, the rate case as you're not planning on filing a 2020 rate case and with Wheatridge expected to come online by the end of 2020 for the wind. Does that imply that you'll be filing a rate case, I guess in beginning of 2020 for the 2021 time period? Or is there a separate filing you can make for just a project that wouldn't require a base rate case? In Oregon, Insoo, because of the RPS that we have here, we have a mechanism we call the renewable adjustment clause. That clause allows us outside of a general rate case to make a filing to bring renewables into customer prices associated with those resources that meet the renewable portfolio standard. And so it's almost like a rifle shot type of a general rate case associated with it. So we'll track it into customer prices that way. Understood. And then in terms of the 100% PTCs associated with the project, does that build on the deferred income tax line? So from a rate base perspective, that will have some kind of offset to rate base? Or is there a more immediate reduction to customer bills as a result of that? Yes, that will continue to build. Understood. And then finally for me, the 4% to 6% growth rate for the 2018 to 2021 time period, is it the 2018 actual results that you guys filed today? And does it does a midpoint assume continued 0.5% retail growth rate? Yes. The long term growth rate that we've mentioned out there before beyond the next years is still 1%. Understood. Thank you very much. Thanks. And our next question comes from the line of Paul Ridzon with KeyBanc. Your line is open. Good morning. Good morning. Good morning, Paul. What was the EPS impact of weather versus normal for the year? For the entire year, it was $0.07 Versus normal and then $0.31 versus Year over year. Yes. What should we look I'm a little confused about the renewable adjustment clause versus AFUDC. Will you be booking AFUDC on this wind asset? Yes, we will be. And can you The Renewable Adjustment Clause is really just a way that we are able to prevent any regulatory lag associated with renewables and not have to have multiple rate cases in terms of bringing that investment into customer prices. We would enter into those agreements with the PUC after the completion of the facility and that would include the AFUDC that we would be accumulating while the construction is taking place. Thank you. So we should look for AFUDC line to trend up this year? Mostly it would be in 2020. Yes. Can you split that 160 between 2019 2020? Most of it will be in 2020. I can't give you the exact number right now, Paul, but the balance of it will be in that particular year with a small amount trickling into 2021. You think about a wind farm and construction projects like this, the vast majority of the early work is civil work and there's not a lot of capital spending until you get to at least midway through the project. How is the wind resource in 2018 versus normal? We were slightly under by about 2 percentage points. What we have seen in the past is actually greater differentials, but we forecast about 32% between our all of our wind resources and we came in right at about 30%. So pretty negligible difference all considering. And as far as equity, just kind of the normal DRIP and employee programs for the year? We don't plan on issuing any equity. None. And then lastly, I don't remember where I saw it, but some discussion about pushing construction of the solar and battery component of this to 23? No, that's not accurate. It should the entire project will be finished by the end of 2021. Do you know where that came from? Was that some proposal somewhere or? I haven't heard that. I have no idea where you saw it. I'll track it. Okay, thank you very much. Those are all my questions. Thanks, Paul. Thank you. And our next question comes from the line of Travis Miller with Morningstar. Your line is open. Good morning. Thank you. Good morning, Travis. A question again on the Wheatridge project. How much was the economics beneficial or improved by that integration having all three of those battery, solar and wind versus what you saw in terms of just wind or just solar projects? How much of that integration helped the economics, if at all? Yes, that's a really good question. First of all, this was a competitive bidding process that was highly competitive. There were a number of bidders into the process, and we saw equipment costs that have been coming down steadily over the last couple of years and pretty commensurate with some of the things you hear around the rest of the country. So very good in terms of just overall competitiveness in each of the components on a standalone basis. What the combination does is it allows you to utilize a little bit more of the transmission resources, as the wind farm is in the eastern part of the state and transmission is one of our higher costs. So that's where you get the incremental increase in economics over time. Okay. Was there any consideration of kind of qualitative aspect of this or perhaps you'd get more capacity credit, not capacity in terms of what's out there capacity, but in terms of available capacity out of this just by having those 3 perhaps, solar helping charge the battery, wind using that battery, however you think about it. Was there qualitative elements? Absolutely. And that allows us to essentially generate more wind and solar energy, store it and then being able to transmit it into the load region of Portland and our service territory at higher rates than we otherwise would be able to do so. So you're absolutely right. Yes. Think about it as solar shifting. We're pulling in energy during the peak hours of the day and we're able to shift it because typically what happens is the sun goes down before we get to our peak load and the battery is going to allow us to be able to shift some of that energy to better meet that peak. And then the wind would also supplement that? Absolutely. We all work together. Okay. And on another topic, how much are you guys watching what's going on directly to the South with PG and E. How close are you watching it? Do you think there's any kind of industry wide or even specifically to Oregon, any kind of precedent that could come out of the whole situation with however long it takes? Just wondering thoughts on that. Well, obviously what's happening in California is very complex and the fires that they've had have been truly tragic. We have some very significant differences in Oregon law versus California law. We do not have anything that looks like inverse condemnation in this state and most states do not. We also operate in a significantly different type of climate, a wet belt with largely different species of vegetation and different types of forests. That being said, everyone in the industry is making sure that all of our tree trimming and vegetation management, all of our equipment is not subject to some of the same things that they've seen in California. And we have always taken the health and safety of our system and the safety of our customers and the communities we serve at the highest priority. So this is really just an extension of what we've always been doing as a utility. Okay, great. Thanks a lot. Thanks, Travis. And our next question comes from the line of Paul Patterson with Glenrock Associates. Your line is open. Hey, good morning. Good morning, Paul. Just on the not filing the rate case, is it just because of the renewable tracker and what have you that you don't have to file? Or is there anything else in terms of sort of the O and M outlook or how CapEx is working within your system that is there anything else we should be thinking about that is allowing you not to go in for a rate case or is there any change in the trajectory there? No. It's back to what I said in my prepared remarks, Paul. It's looking at the overall investments and the value that those investments are making from an OpEx perspective. It's the growth in our service territory and our customers, kind of the strong economy that we have out there. So those and several other items are helping us focus on trying to stay out and trying to make sure that we keep our prices low for our customers and continue to be a very competitive company. Great. And is there do you have any idea when you might be going back in again or? No, we'll evaluate that on an annual basis, Paul. Okay, great. And then, with respect to just to sort of follow-up on Travis's question, is there a sort of a capacity value sort of quantitatively that's associated with this Wheatbridge project. If you follow me, if we look at all the megawatts and what have you, how do we think about sort of the firm capacity that it provides because of battery because of the combination, if you follow me? Is there a key number with that? Yes, that's a really good question. This was an RFP for energy. And as we begin to study and work with the battery and solar components, we will know a lot more going forward. As we indicated in some of the press materials, this is a first of its kind in the country at this kind of scale. And so we have a lot to learn and we're very much looking forward to being able to understand the capacity values, but this was an energy RFP. Okay. So the capacity value that one would assume with the combinations there, that's not really factored into the economics that allowed it to win the RFPs. Is that appropriate to say? It's all factored in, but it's factored in on a much more of an energy basis because that was the criteria of the RFP. Okay. And you said it was extremely competitive. Can you you can't quantify any more than that? No, unfortunately, we can't. Okay. And then just finally, there is I think there might be some legislation that comes any outlook on legislation and sort of carbon outlook and what that might mean for you guys? Can you elaborate a little bit on that? Sure. And just for others who may not be aware, one of our governors' top priorities is a cap and trade legislation. It's consistent with the state's targets to reduce emissions or carbon emissions by 80% from 19 90 levels by 2,050 and is also consistent with the plans that we've been talking about as a utility for a while in our decarbonization studies that we did ourselves. At present, we're looking very closely at the legislation, which has just been in detail for about 10 days now and working collaboratively with legislators and the governor's office. Our main interest is making sure that customers don't pay twice as we reduce the carbon impact of our generation, and that we continue the trajectory of adding renewables and producing less carbon emitting electricity as we go forward. Okay, great. Thanks a lot. Thank you. Thank you. Thank you. And our next question comes from the line of Gregg Orrill with UBS. Your line is open. Good morning, Greg. Hi. Good morning. Thank you. I was wondering, is the basis for the growth rate guidance 2.37% in 2018? So yes, in 2.37%, one of the things you should recognize is that we do have the one time gain from the Carty settlement, which is a non operational item. And that's the only adjustment? Yes. Thank you. Thanks, Greg. And our next question comes from the line of Vedula Murti with Avon Capital. Your line is open. Good morning. Good morning. Just to follow-up on Craig's question and as I recall, I think the that one time gain was $0.12 if I recall. So actually, the 4% to 6% should be off of a $2.25 number. Is that correct? No, 2.37 base. Even with The year over year associated with that gain was 0 point 11 Okay. So the $2.37 is the correct base? Yes. Okay. And I see, obviously, with the elevated capital spend, rate base is growing at a rate that would tend to support 4% to 6%. You go back out to 20222023 back to 500 given DD and A is at 400 plus right now, rate based growth slows back down again. So I'm wondering if you can discuss a little bit about any backfill opportunities and potential magnitudes there that you're evaluating and at this point in terms of rate pace? Thank you for your question. As you know, we take a look at our capital on a regular basis and have attrition of updating it pretty substantially in the fall. At this point in time, we have a lot on our plate and we'll be looking at those added years as we move forward. So there's nothing to update you on right now. Okay. And at this point, given that the tracker mechanism will put in the RFP assets into rates. Should we assume that come post-twenty one that you'd still be able to because of growth and efficiencies be able to continue to stay out? Yes. No. As I mentioned earlier, we are looking at it on an annual basis as to whether we will need to file a January or not. So we do remain very enthusiastic about the growth of our region. We have a number of industries that are finding this area very attractive for a variety of reasons. Do you believe that you can sustain the growth that you just highlighted here for the 2018 through 2021 period beyond 2021? We're not giving any guidance beyond the 'twenty one time period at this particular point. Okay. Thank you very much. Thanks. Thank you. Our next question is a follow-up question from Paul Ridzon with KeyBanc. Your line is open. Thank you again. Welcome back, Paul. Thanks. Getting pained with a little bit of what I think is some confusion, what was the Carty gain? And just to clarify, the base for the 4% to 6% is 2.37%. Yes. You've got that right. The gain on Carty was $0.11 That's the year over year. So that is the drop off of some expenses in 2017 and then the cash payment? Yes. And then what was the average quick balance in 2018? About 250,000,000 Thank you again. Okay, thanks a lot. Thank you. Thank you. Our next question comes from the line of Greg Rice with Centenus. I wanted to clarify the base here, but it seems like you guys are saying it's $237,000,000 and you don't have to strip anything out of that number? Yes. Correct. That's right, Greg. Perfect. And then another quick question, just on the $45,000,000 that you guys reserved to give back for tax reform. Is that sitting in cash on the balance sheet or is there like a regulatory liability on the balance sheet for it? There is a regulatory liability. We'll be passing it back to customers over the next 2 years. And does that flow into a rate base or is that or is the ADA portion a different number? That's a good question. Greg, I'll get back to you on that one. Thank you so much. Okay. No problem. I think it's rate based, but I want to make sure I give you the right answer. And I'll have Chris follow-up with you. Not a problem. That's all I have. Thank you, guys. Thanks, Greg. Thank you. And we have a follow-up question from Paul Ridzon with KeyBanc. Your line is open. Is there a reason you're not backing that $0.11 out? Is it an offset somewhere? No. Okay. Thanks. Okay. Thanks, Paul. And thank you, everyone. We appreciate your questions and interest in joining us for today's call. For those who are attending the Bank of America Merrill Lynch or Williams Conferences in March, we look forward to seeing you. And we also invite everyone else to join us for our Q1 call in late April. Thank you very much, and have a good day. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.