Good morning, everyone, and welcome to Portland General Electric Company's fourth quarter 2018 earnings results conference call. Today is Friday, February 15th, 2019. This call is being recorded, and as such, all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key on your telephone keypad. If you do intend to ask a question, please avoid the use of speakerphones. For opening remarks, I will turn the conference call over to Portland General Electric's Director of Investor Relations and Treasury, Chris Liddle. 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 two, 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-looking 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-K.
Portland General Electric's fourth quarter and full year 2018 earnings were released via our earnings press release and Form 10-K 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. This 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. Good morning, everyone. 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 of its scale, and cost-competitive in delivering carbon-free energy to customers. Turning to slide four. 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 2019 full-year earnings guidance of $2.35-$2.50 per diluted share, as well as providing long-term earnings growth guidance of 4%-6%. Jim will provide the details on each later on the call. Turning to slide five.
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 immigration 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 Avenue 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 million in cash settlement proceeds. Turning to slide six.
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 first 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% federal production tax credits. The solar and battery components will be completed in 2021 and will qualify for 100% 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 million for its own portion of the project, and this amount is included in our updated capital expenditure forecast. In addition, we're 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.
Now I'm pleased to turn the call over to Jim. Thank you.
Thank you, Maria. Turning to slide seven. In December, the OPUC adopted all stipulations and resolved the remaining contested issues in our 2019 general rate case, approving a revenue increase of approximately $9 million that took effect January 1, 2019. This included a rate base of $4.75 billion, up from our previously authorized rate base of $4.5 billion, while maintaining our 50% equity capital structure and a 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 will continue to reevaluate the need to file on an annual basis. Turning to slide eight, which shows earnings drivers for 2018.
First, gross margin reduced earnings by $0.19 due to a $0.31 decrease attributable to mild weather in 2018 when compared to 2017. That was offset by $0.12 attributable to lower purchase power and fuel costs, as well as increased wholesale revenues. Second, 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 $0.01. Finally, a decrease of $0.02 per share due to other miscellaneous items. On slide nine, 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 first mortgage bond issuance capacity of $1 billion, cash available short-term credit, and letter of credit capacity totaling $755 million, and a common equity ratio of 49.8%. In January of 2019, we executed an amendment to a revolving credit facility of $500 million, extending the termination date to November of 2022. In December, we issued $75 million of first mortgage bonds at an interest rate of 4.47% that will mature in 2048. In 2019, we expect to fund estimated capital expenditures with cash from operations, the issuance of debt securities up to $375 million.
In April, we issued $200 million of first mortgage bond securities at an interest rate of 4.3%, maturing in 2049. As shown on slide 11, we're initiating full year 2019 guidance of $2.35 to $2.50 per diluted share, which assumes an increase in retail deliveries of approximately a half percent weather-adjusted, average hydro conditions for the year, wind generation for the year based on five years of historical levels or forecast studies when historical data is not available, normal thermal plant operations, operating and maintenance costs between $585 million and $605 million, and depreciation and amortization between $400 million and $420 million. In 2019, we are forecasting an effective tax rate between 10%-15%, which will be slightly higher than in 2018 due to fewer production tax credits and higher pre-tax book income. We're also forecasting an average CWIP balance of $250 million.
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%-6% earnings per share growth rate on average for the period 2018 through 2021. We will get there through a combination of three factors. First, 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. Second, strong economics in our service territory, which drive both investment and growth in demand, help to offset operational costs. Third, investment in renewable and energy storage, including the Wheatridge Renewable Energy Facility and our pilot energy storage projects. Now, operator, we're ready for questions.
Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we do ask that you please place your line on mute once your question has been stated. Thank you. 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 following 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 that 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. It's almost like a rifle shot type of rate case associated with it. We'll track it into customer prices that way.
Understood. In terms of the 100% PTCs associated with the project, does that build on the deferred income tax line? From a rate base perspective, that'll have some kind of offset to rate base, or is there a more immediate reduction to customer bills as a result of that?
Yeah, that will continue to build.
Understood. Finally for me, the 4%-6% growth rate for the 2018-2021 time period, is it the 2018 actual results that you guys filed today, does the midpoint assume continued half a percent retail growth rate?
Yes. The long-term growth rate that we'd mentioned out there before, beyond the next few years, is still 1%.
Understood. Thank you very much.
Thanks.
Our next question comes from the line of Paul Ridzon with KeyBank. Your line is open.
Good morning.
Morning.
Morning, Paul.
What was the EPS impact of weather versus normal for the year?
For the entire year, it was $0.07.
Versus normal, then 31 versus-
Year-over-year.
Okay.
Yeah.
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.
Okay. can you-
The Renewable Adjustment Clause is really just a way that we're 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's taking place.
Okay. Thank you. we should look for AFUDC line to trend up this year?
Mostly it'd be in 2020.
Yeah.
Can you split that 160 between 2019 and 2020?
Most of it will be in 2020.
Yes.
I can't give you the exact number right now, Paul, the balance of it will be in that particular year, with a small amount trickling into 2021.
When you think about a wind farm and construction projects like this, the vast majority of the early work is civil work.
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 two percentage points. What we have seen in the past is actually greater differentials, but we forecast about 32% between all of our wind resources, and we came in right at about 30%. Pretty negligible difference, all considering.
As far as equity, just kind of the normal drift in employee programs for the year?
Yeah, we don't plan on issuing any equity.
No? Okay. Lastly, I don't remember where I saw it, but some discussion about pushing construction of the solar and battery component of this to 2023?
No, that's not accurate. 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.
We have no idea where you saw it.
I'll track that down. Okay, thank you very much. Those are all my questions.
Thanks, Paul.
Thank you. Our next question comes from the line of Travis Miller with Morningstar. Your line is open.
Good morning. Thank you.
Morning, Travis.
Hi. Question again on the Wheatridge project. How much was the economics beneficial or improved by that integration, having all three of those battery, solar, wind, versus what you saw in terms of just wind or just solar projects? How much did that integration help the economics?
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. 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. 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. That's where you get the incremental increase in economics over time.
Okay. Was there any consideration of kind of the qualitative aspect of this, where 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 three perhaps, solar helping charge the battery, winds using that battery. However you think about it.
Yes
Was there qualitative elements?
Absolutely.
Okay.
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. You're absolutely right.
Yeah. Think about it as solar shifting.
Yeah.
We're pulling in energy during the peak hours of the day, we're able to shift it because typically what happens is the sun goes down before we get to our peak load, the battery's going to allow us to be able to shift some of that energy to better meet that peak.
The wind would also supplement that presumably?
Absolutely. It will all work together.
Okay. On another topic, how much are you guys watching what's going on directly to the south with PG&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. 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. We have always taken the health and safety of our system and the safety of our customers and the communities we serve as the highest priority.
This is really just an extension of what we've always been doing as a utility.
Okay, great. Thanks a lot.
Thanks, Travis.
Our next question comes from the line of Paul Patterson with Glenrock Associates. Your line is open.
Hey, good morning.
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&M outlook or how CapEx is working within your system? 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. 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. Do you have any idea when you might be going back in again?
No. We'll evaluate that on an annual basis, Paul.
Okay, great. 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 Wheatridge 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 the combination, if you follow me?
Yeah.
Is there any number with that?
Yeah, that's a really good question. This was an RFP for energy. 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. We have a lot to learn, and we're very much looking forward to being able to understand the capacity values. This was an energy RFP.
Okay. The capacity value that one would assume with the combination 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. You said it was extremely competitive. You can't quantify it any more than that?
No, unfortunately we can't.
Okay. Just finally, 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. Just for others who may not be aware, one of our governor's 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 1990 levels by 2050, and is also consistent with the plans that we've been talking about as a utility for a while and 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. Our next question comes from the line of Gregg Orrill with UBS. Your line is open.
Morning, Gregg.
Morning.
Hi. Thank you. I was wondering, is the basis for the growth rate guidance 237 in 2018?
Yeah, in 237, 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.
Right. That's the only adjustment?
Yeah.
Thank you.
Thanks, Gregg.
Our next question comes from the line of Vidula Moorti with Avon Capital. Your line is open.
Good morning.
Good morning.
Just to follow up on Gregg's question, as I recall, I think that one-time gain was $0.12 if I recall. Actually, the 4%-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 $0.11.
Okay. The 237 is the correct base?
Yes.
Okay. I see, obviously with the elevated capital spend, rate base is growing at a rate that would seem to support 4%-6%. When you go back out to 2022 and 2023, back to 500 given DD&A days at 400+ right now, the rate base growth slows back down again. 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 base.
Thank you for your question. As you know, we take a look at our capital on a regular basis and have a tradition 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 outer years as we move forward. There's nothing to update you on right now.
Okay. At this point, given that the tracker mechanism will put in the RFP assets into rates, should we assume that come post 2021, that you'd still be able to, because of growth and efficiencies, be able to continue to stay out?
Yeah. Oh.
No.
Yeah.
As I mentioned earlier, we are looking at it on an annual basis as to whether we will need to file a general rate case or not.
Okay.
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 2021 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 KeyBank. Your line is open.
Thank you again.
Welcome back, Paul.
Thanks. Getting pinged with a little bit of what I think is some confusion. What was the Carty gain? Just to clarify, the base for the 4%-6% is $237?
Yeah.
Yes. You've got that right. The gain on Carty was $0.11. That's the year-over-year.
That is the drop off of some expenses in 2017, the cash payment?
Yes.
What was the average CWIP balance in 2018?
About $250 million.
Thank you again.
Okay, thanks.
Thank you.
Thank you. Our next question comes from the line of Greg Rice with Sentinus. Your line is open.
Hey, guys. How's it going?
Morning.
Good, thanks.
Yeah, just wanted to clarify the base here, it seems like you guys are saying it's $2.37, and you don't have to strip anything out of that number.
Yeah.
Correct.
That's right, Greg.
Perfect. Another quick question just on the $45 million that you guys reserved to give back for tax reform.
Is that sitting in cash on the balance sheet, or is there 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 two years.
Does that flow into rate base, or is the ADIT portion a different number?
That's a good question. Greg, I'll get back to you on that one.
I think those are there.
Okay.
Yeah.
No problem.
I think it's the rate base, but I want to make sure I give you the right answer. I'll have Chris follow up with you.
Not a problem. That's all I had. Thank you, guys.
Thanks, Greg.
Thank you. We have a follow-up question from Paul Ridzon with KeyBank. Your line is open.
Is there a reason you're not backing that $0.11 out? Is it an offset somewhere, or?
No.
Okay. Thanks.
Okay.
Thanks, Paul. 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. We also invite everyone else to join us for our first quarter 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.