Earnings Call: Q3 2018

Oct 26, 2018

Good morning, everyone, and welcome to Portland General Electric Company's 3rd Quarter 2018 Earnings Results Conference Call. Today is Friday, October 26, 2018. 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 the opening remarks, I will turn the conference call over to Portland General Electric's Director of Investor Relations and Treasury, Chris Little. Please go ahead. Thank you, Heather. 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 in 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 the forward looking statements made today. For a description of some of the factors that may occur that could cause such differences, the company requests that you read our most recent Form 10 ks and Form 10 Q. Portland General Electric's Q3 earnings were released via our earnings press release and the Form 10 Q before the market opened today, both of which are available at 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 Pope. Thanks, Chris, and good morning, everyone. With the Kearney settlement behind us, we're focusing our full attention on the future. In the Q3, our operating performance from generation to transmission and distribution was strong and we continue to see benefits from in migration and a healthy economy. Turning to Slide 4. We reported net income of $53,000,000 or $0.59 per share compared with net income of $40,000,000 or $0.44 per share in the Q3 of 2017. This quarter, we recognized $10,000,000 in proceeds from the Cardi cash settlement or 0 point 0 $7 per share, which partially offset previously expensed items. What is most notable about the 3rd quarter is that we saw more volatility in the energy markets across the West than we've seen in the last decade. We're very pleased with how we managed through these market fluctuations. Not only did we maintain reliability, but we were able to control costs effectively. Jim will share more details on this later. Turning to slide 5. I'm pleased to share that our service area continues to experience strong economic growth with low unemployment rate of 3.3% and population growth of 1.6%. Construction activity remained steady in Portland with current projects focused on mixed use and residential buildings. Our service areas low cost relative to Seattle and the Bay Area continue to make this region attractive apparel and technology companies. And proximity to Asian markets and the enhanced fiber connections make the area particularly appealing to data centers. Now turning to slide 6. We continue to execute on our clean energy vision and our strategy to reduce greenhouse gas emissions. Our renewable request for proposal for additional resources garnered highly competitive bids And we've recently submitted a shortlist of those proposals to the OPUC. These 6 bids from 3 bidders includes a combination of wind, solar and battery storage. Also on this shortlist is PGE's 3rd party joint bid for 36 average megawatts of company owned wind resources and a power purchase agreement for another 83 average megawatts. The commission is expected to acknowledge the shortlist by early December and we expect to complete contract negotiations and announce the results shortly thereafter. We continue to work at the commission and intervenors on our green tariff, a green energy product designed for municipalities and other large customers who want 100 percent renewable energy. Additionally, we have a number of smaller projects that we hope to grow in the future. These efforts include 3 Smart Grid projects adjacent to substations being upgraded, 6 Electric Avenues and a joint project with our local transit authorities as well as plans to move forward on our 5 proposed energy storage projects. PGE customers and the region continue to push for further growth in renewables and carbon free technologies. Portland placed 10th on a recent list ranking America's 100 Greenest Cities and was just named a winner in the Bloomberg American Cities Climate Challenge. And now I'm pleased to turn the call over to Jim. Thank you. Thank you, Maria. As Maria mentioned and as shown on Slide 7, we are affirming our full year 2018 earnings guidance of $2.25 to $2.40 per diluted share. We currently expect to be towards the middle of this range. Turning to Slide 8, which shows earnings drivers for the quarter. First, the Cardi cash settlement increased earnings $0.10 per diluted share due to a $0.07 increase related to a $10,000,000 pretax cash settlement proceeds and a $0.03 increase related to avoided carrying costs our carrying and litigation costs. 2nd, gross margin increased earnings by 0 point and lower natural gas prices, allowing for the increased economic dispatch of our plants, offset by a $0.02 decrease due to less favorable weather quarter over quarter, followed by a $0.01 decrease in other expenses. As Maria mentioned in the Q3, electricity prices in the West were extremely volatile as a result of wildfires and natural gas constraints in California due to unplanned pipeline outages and a methane leak that reduced capacity at the state's largest natural gas storage facility. Our power operations team did an excellent job managing our diverse energy portfolio and used the opportunity to lower natural opportunity of lower natural gas prices and higher electric wholesale prices to manage costs and help maintain the reliability of the system. In particular, this helped to mitigate minimal wind output slightly below normal hydro production and thermal generation outages largely due to emission testing at the Colstrip's Units 34. The testing has been completed and the units have been operational since September. Moving to Slide 9. Last month, we settled all revenue requirement issues related to the 2019 general rate case. The agreement resulted in a 9.5% return on equity, a 7.3% cost of capital, a 50% debt and 50 percent equity capital structure and a rate base of $4,750,000,000 which includes our customer information system. To the extent that rate base ends up being higher, we will manage our operating cost provide a return on incremental capital. The average customer price increase is expected to be less than 1 percent with final power cost updates due in mid November. The remaining issues to be resolved include our proposal for full volumetric decoupling, the storm restoration balancing account and trended weather in the load forecast. Regulatory review will continue until the final order is issued, which is expected in December 2018 with new customer prices going into effect January 1, 2019. On to Slide 10, we provide a summary of the company's current capital expenditure forecast from 2018 to 2020 related to investments that support our continued customer growth, development of a more efficient, reliable and secure system. In managing these expenditures, we're moving to a rolling planning process that may result in more frequent updates to our capital forecast. We will continue to deliver our primary capital updates every 3rd quarter. As shared in our previous calls, we have not included any capital expenditures in our forecast related to potential projects pursuant to our renewable RFP. On to Slide 11, we continue to maintain a solid balance sheet, including strong liquidity and investment grade credit ratings. As of September 30, we had cash available short term credit and letter of credit capacity totaling $861,000,000 1st mortgage bond issuance capacity of 1,100,000,000 dollars and a common equity ratio of 50.1%. In 2018, we expect to fund estimated capital requirements with cash from operations, debt issuances of $75,000,000 and commercial paper as needed. And now operator, we're ready for questions. Thank Your first question comes from Christopher Turnure with JPMorgan. Your line is open. Good morning, Chris. Good morning, guys. Could you give us an update on your dividend strategy and perhaps more broadly your cash return strategy to shareholders in the event that you do not end up owning any wind in the RFP process here? Sure. Thank you, Chris, and good morning. As you know, we target our dividend payout ratio between where we expect earnings to go over time and we are committed to having a healthy dividend and continuing to grow our dividend into the future. As we look at our capital expenditures, you probably saw that we took up our forecast, not only for 2019, but also in the outer years. And we expect to have really robust opportunities to invest in our system to be able to enhance the reliability as well as the security, prepare for environmental issues that we see and then also set the foundation for a smarter, more integrated grid. Got you. So it sounds like plenty of opportunities to invest. Clearly, you guys have erred on the conservative side historically in providing us with CapEx updates and wanting to make sure there was visibility in your plan there. So is it fair to say that there would be no change to the dividend payout or kind of historical growth trend coming up when you typically review that in the middle part of next year? You're absolutely right. We do review our dividend payout strategy generally in the springtime and our Board makes the announcements thereafter. And we continue to target the range of between 50% and about 70% of our earnings paid out each year. Okay. And then also a little bit of a longer term question. Looking beyond just this year, how do you think about load growth potential? And in particular, when you're thinking about that, is it something that you have maybe more confidence in now that could help you stay out of rate cases beyond this year? So that's a terrific question. We have talked in the last couple of quarters about our load growth. And as we've noted, we're in a really admirable position to be in with regard to actually having load growth as a utility and we expect to actually have more going forward. Right now, we're looking at roughly about flat load, and expect to return to a more normal rate of about 1%, largely due to the very robust in migration we have in our region and in the state. The state is growing at about 1.3% and we're seeing immigration in our service territory of about 1.6%. We continue to see also growth in businesses coming into this area and are very pleased with the types of companies coming here. Okay. And is the nature of that growth that you're referring to something that would allow you to benefit with the current partial decoupling mechanism? Or is it something that would kind of accrue to customers? No, it would generally accrue to customers. What our growth does is it really does offset some of the energy efficiency that we see on a regular basis. But the current decoupling mechanism that we have really relates more to weather. The other thing to keep in mind, Chris, a lot of this growth that we're looking at on a future basis has to do with industrial loads. Yes, very good point. Got it. All right. Thanks, Jim and Maria. Thank you. Your next question comes from Julien Dumoulin Smith with Bank of America. Your line is open. Good morning. Julien Dumoulin Smith. Hey, good morning. Can you hear me? Yes. Yes. Excellent. Well, congratulations. I wanted to follow-up on a handful of items here. Quickly, if you can, just in the context of the new CapEx, what exactly is reflected? And I suppose I'm asking that first with an eye towards the typical Q3 updates that you all provide around substations and distribution upgrades? And then secondly, you include a comment on the side of Slide 10 with respect to upgrades and replacement of aging generation. Does that reflect anything with respect to the wind RFP? I suspect not, but want to reconcile that. And also with respect to the storage socket as well. Just want to make sure we're clear about the 500,000,000 dollars in 2018, 2019 too. So how many questions was that, Chris? Or Julian, sorry. Sorry. No worries, just teasing you. So as Maria had pointed out earlier, we take the CapEx budget to the Board every Q3 and we've updated that and updated the disclosures associated with it. What we're trying to do is provide you more visibility into what we think things look like on a long term basis. And in doing that, it is into the items that we have continued to talk about. It is we've got a tremendous amount of customer growth that is going on in our system. So we're investing in that those line extensions, those new sub stations that are required to support that industrial load that's been coming into our area. It's adding more capacity into the system to be able to deliver to those particular points where all the growth is continuing. We're continuing to invest in the environmental side of our infrastructure. As we've talked about before, we've got a lot of transformers and some switchgear out there with PCBs in it that we're trying to reduce their existence in our service territory. We are continuing to focus on the rest of the aging infrastructure that exists out there. We've got thousands of miles worth of underground cable that we need to remove that are causing faults that are increasing our O and M expenditures for the company. So the time our crews are out there chasing these types of faults. So we're spending a lot of time and effort on those. We're also spending a lot of focus on resiliency of the system from a cyber perspective. So on the IT side, from being the systems that are in our offices to the systems that are out into the the systems that are out into the field. And then it's from a seismic perspective, the fact that we are in the Cascadia subduction zone and just recently there were additional faults that were identified under Mt. Hood. There were additional faults that were identified under Mt. Hood that will impact our service territory as well. So a lot of continual capital focus on the items that we have talked about before along with trying to move forward what we call an interoperable grid. So it's the ability to not only move energy in one particular direction out to our customers, but be able to integrate with technology that will be out in the field, whether as on our side in the operations or resiliency of the system or over on the customer side as far as energy management and distributed resources. So Julien, with regards to your specific question on generation, that relates to our Westside hydro projects. Jim mentioned seismic and related generation area. Many of those facilities are about 100 years old or more And we have been on a program to reinvest there and are looking at repowering 1 of the facilities. The wind RFP is not included in the capital forecast. However, the storage projects that we have been talking about for the last couple of quarters are included. And just to reconcile or clarify rather, the typical distribution CapEx update cycle that you've done historically with Q3, is that also reflected or should we be expecting something more robust with Q4 here as well? No, that's included now. Yes. Okay. What we'll see is more visibility inside the company than we have in the past. Got it. Thank you all very much. Thanks, Julie. Thank you. Thank you. Your next question is from Insoo Kim with Goldman Sachs. Your line is open. Good morning, everyone. Good morning, Jim. Turning to the CapEx plan that you guys have, I know the RFP is not currently in there, but if it were to be if one of the Portland's plans were to be selected with the associated CapEx be purely incremental to what's shown in 2019 2020? Or would there be some reshuffling potentially to get to a level that's not purely additive? Into that, it would be incremental to that plan. Got it. And then could you just provide a little bit more color on the I guess on the mix of the PPN owned renewable capacity that you guys had in your proposals and what kind of factors went into that mix? Sure. So we have a partner that we have been working with for some time on wind project development that also includes solar and battery storage. And we have a mix roughly where we are doing about 36 megawatt average megawatts and they're doing the balance or about 80 some odd megawatts. It's been a terrific partnership and has resulted in a competitive bid. I would say that we have received several competitive bids and the process remains ongoing. Understood. Thank you very much. Thank you. Thanks, Insoo. Thank you. Your next question comes from Paul Ridzon with KeyBanc. Your line is open. Good morning, Paul. Good morning, Paul. Good morning, Paul. Good morning, Paul. Good morning, Paul. Good morning, Paul. Good morning, Paul. Good morning, Paul. Good morning, Paul. Good morning, Paul. Good morning, Paul. Good morning, Paul. Good morning, Paul. Good morning, Paul. Good morning, Paul. Good morning, Paul. Good morning. Thank you for the CapEx update and we appreciate the more frequent dialogue. Do you envision maybe giving a little more granularity as to kind of the buckets that this capital is going into? Not at this particular point in time, Paul. Okay. And then, Jim, I think you said you kind of felt comfortable with the middle of guidance. That implies a weak Q4. What are some of the things that are going to hit the Q4? Well, it kind of goes back to the comments that Maria had made and I had made regarding power costs going into the Q4. You've got the Enbridge gas issue up in Canada that is derating the amount of gas coming down the I-five quarter. So that's causing power prices to be a bit higher and it's causing the gas prices and the I-five corridor to be significantly higher. I mean gas, I think for tomorrow or for tomorrow is like $10 for the Tsumas. And so that's going to be an issue. With that and we are going into the winter season, so storm restoration, we're expecting that to be a little bit of a challenge. And we've just got a few things to get done before we get to the end of the year. One of the things I wouldn't under appreciate is given the volatility that we saw in energy markets in late July early August, we took early action to drive to an earnings result and worked hard on our O and M under Jim's direction. Given that was possible largely because of the hard work that everyone put into it, but also the pretty good weather that we had. And as we head into much more challenging November December from a weather situation, we'll have a lot higher storm restoration and other costs, which are more typical of a Q4. O and M was down markedly this quarter. What was that plant outage time or what drove that? It was driven by not just in the quarter, but it was driven by the plant outages there. You got to keep in mind that we had recorded the change in or not the change, but the settlement associated with Cardi at the same time. And lastly, staff commented on your process in the RFP and had some questions. Kind of what's the next step there? So the next step is for us to work through the process of the shortlist. We are also beginning negotiations with all of the parties because we need to be able to conclude by the end of the year to be able to fully incorporate all the PTCs into these projects. Okay. Thank you. Thank you. Thanks, Paul. Thank you. Your next question comes from Travis Miller with Morningstar. Your line is open. Good morning. Thank you. Good morning, Travis. Just a real quick clarification on the RFP. Would you guys have any kind of involvement in that battery or storage part, either CapEx or some kind of supporting infrastructure or is it just that 36 megawatts of wind? So the battery storage part is inclusive of the PPA section, but we're working collaboratively with our partner. And we have other battery storage projects that are ongoing at the company, total about $44,000,000 investment going forward. In that case, we're looking at putting battery storage in residential as a testing it. We're looking at battery storage in our substations, micro grids and then out at our generating one of our generating plants. Okay. And that'd be separate from this renewable RFP? Yes, it is. Okay. And then following up on a previous question, I was going to ask about the split in that $500,000,000 either 2021 or 2022 in terms of distribution generation transmission, is that something that you're not going to break out? Is that how I understood you answer the other previous question? Yes, we're not breaking it out at this point in time. The vast majority of our incremental capital expenditures are in our transmission and distribution area as we go forward. Got it. We're seeing as Jim has mentioned, we're seeing substantial We're seeing as Jim has mentioned, we're seeing substantial customer growth. We also have catch up to do in terms of our resiliency, environmental expenditures and really beginning to do the incremental steps around smart bidirectional grid is really where we're focused our spending. Okay. And then one higher level. As you looked out to 2022, you're putting together that CapEx budget and even more operational spending, I imagine you're looking out there. Was there a specific allocation and your thoughts around electric vehicles playing a role there and how they play a role throughout all the CapEx. But just wondering if it was large enough in your view looking out that far to actually be a specific allocation or some material amount directly related to That's a really good question. And we're doing a lot with regards to electric vehicles. We have the electric avenues that we are working collectively with car working with car manufacturers and distributors as partners. And I'm really excited about the partnerships that we have with several of our local transit authorities. But none of that capital amounts to a significant amount to completely separate it out at this point in time. We might get there in the future. But I think this will be we will see sort of all sorts of parties come together to make electric transportation really happen within our service area. Okay, great. Thanks so much. Appreciate it. Thank you. Thank you. Your next question comes from Ashar Khan with Friction. Your line is open. Hi, good morning, Ashar. How are you doing? Can I just ask, as we take the midpoint of the guidance, can we assume that this is a pretty normalized year in terms of takes and ask? I mean, would this assume that weather was normal for the year? I mean, you had weak weather in the beginning and I know strong weather in the 3rd, but is now like weather 0? I was just trying to get a better sense of what a good normalized number would be for this year, if you can help on that. Well, the big difference, Ashar, is the Cardi cash settlement that we had. I mean, that brought in $130,000,000 and a $10,000,000 reduction in our A and G costs as it partially offset some of the cost of chasing those settlements. Outside of that, loads weren't off that much. Power costs were not normal for this particular year given what we have seen. We had an outage in the Boardman plant, an outage associated with coal strips Units 34. And then as we were mentioning earlier, we have the Enbridge Gas situation in the Pacific Northwest. Could you quantify how much off normal would that end up in the year as we look at right now in your forecast for the year? How much No, I couldn't do that off the top of my head. I wonder, given the volatility that we've seen in gas prices and in energy prices this year, but also energy prices last year, whether there ever is going to be something as truly normal, in terms of weather in our region. It's one of the reasons in the rate case that we're looking for additional decoupling mechanisms that are more typical of what you see in other states across the country. And the trend in weather as well, trying to shorten that up given climate change. Okay. And so then can I just follow-up? If I read the queue correctly, you booked like $8,000,000 $1,000,000 related to Carty before you stopped at least it said year to date. So can I take then that $9,000,000 or so and after tax it at your 20% rate or something like that, which kind of gives you like $0.06 or $0.07 that we booked negative $0.06 or $0.07 this year related to CAR T that was in it, but then we got a positive, what is it, dollars 0.10 or $0.12 right? Am I correct? So in the net, the CAR T really helped the year by about $0.03 or $0.04 overall. Is that the right way to look at it or am I doing my math wrong? Well, we what we had was the $130,000,000 settlement and after we looked at what was still on the books at above the 514 $1,000,000 that we had agreement with the commission on, that left us with eventually $10,000,000 and we applied that $10,000,000 to the A and G. Now what that did from an EPS perspective is we had a onetime change of $0.07 and we avoided about $0.03 of additional costs going forward as we are continuing or we would have had to have continued to chase that litigation, absent the settlement. Okay. Okay. I kind of forget it. And then can I just ask a better sense on depreciation? I mean depreciation increased by like €30,000,000 or so from 2017 to 2018. Is that the kind of run rate one should expect going forward? It's probably a hard number, but I thought just checking if you can give some anything on that regards. Yes, that's it is a little bit of an anomaly in there in that not only you're seeing 2 things. One thing is you're seeing that capital additions a little higher than what the retirements would be. The other thing is that in there, we were collecting over a 3 year period about $52,000,000 associated with the Trojan Spent Fuel Decommissioning Trust. So we were crediting back about $17,000,000 annually or $52,000,000 total. So it showed up as a reduction in depreciation in the past and it was also reflected in the revenue line as well. Well, that's now run its course and so that's why you're seeing a bit of a jump up in depreciation year over year. So the depreciation is more its normal level what you're saying? It's okay. Yes. Okay. Okay. Because it was went down because of them. Okay. I really appreciate your time. Thank you. Okay. Thanks, Ashar. Thank you. Your next question comes from Vedula Murti with Avon Capital. Your line is open. Good morning. Good morning. A couple of things. One, can you remind me since the capital program slide does not include the potential wind RFP spending that if that were to come to pass, how that would be allocated? How much and how is that spread out? Sure. You could be looking at anywhere between $150,000,000 $1,000,000 $200,000,000 over 2019 2020. Will I do that pro rata or would that be back end loaded or how should I how would I want to spread that? At this point in time, it's too premature to speculate. I would just follow your own judgment. Okay. And also I'm wondering if we just take a look at the capital program as it is, relative to depreciation and other gives and takes, will that then translate into net rate base growth over on an annual basis if depreciation is running like 380 or something like that at least as of now and CapEx is as it's shown here right now? What does that translate to in terms of rate base growth? So we don't disclose exactly our long term rate base growth or our long term earnings growth forecast. We leave that up to you to do the math as we go forward. Well, I mean, would I would it be incorrect then to take say, dollars 500,000,000 of capital in 2020 and I see depreciation of 380 $1,000,000 of net rate base growth? That's roughly how you would do them now. Okay. All right. Thank you very much. Thank you. Thank you. We very much appreciate your time. I'm sorry, I'm showing no further questions at this time. I'd like to turn the call back over to Maria Pope for closing remarks. Thank you. We very much appreciate your interest in Portland General, and we invite you to join us when we next report our earnings and the 4th quarter results in February 2019. So thank you very much and have a great weekend everyone. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you all may disconnect. Everyone have a wonderful day.