Good morning, everyone, and welcome to Portland General Electric Company's third quarter 2018 earnings results conference call. Today is Friday, October 26th, 2018. 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 one 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 the opening remarks, I will turn the conference call over to Portland General Electric's Director of Investor Relations and Treasury, Christopher Liddle. 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 two, 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-K and Form 10-Q.
Portland General Electric's third quarter earnings were released via our earnings press release in 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. It's my pleasure to turn the call over to Maria Pope.
Thanks, Chris. Good morning, everyone. With the Carty settlement behind us, we're focusing our full attention on the future. In the third quarter, our operating performance from generation to transmission and distribution was strong. We continue to see benefits from in-migration and a healthy economy. Turning to slide four. We reported net income of $53 million, or $0.59 per share, compared with net income of $40 million, or $0.44 per share in the third quarter of 2017. This quarter, we recognized $10 million in proceeds from the Carty cash settlement, or $0.07 per share, which partially offsets previously expensed items. What is most notable about the third 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 five. 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 remains steady in Portland, with current projects focused on mixed-use and residential buildings. Our service area's low cost relative to Seattle and the Bay Area continue to make this region attractive to apparel and technology companies. Proximity to Asian markets and the enhanced fiber connections make the area particularly appealing to data centers. Now turning to slide six. 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. We've recently submitted a short list of those proposals to the OPUC. These six bids from three bidders includes a combination of wind, solar, and battery storage. Also on this short list is PGE's third-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 this short list by early December. We expect to complete contract negotiations and announce the results shortly thereafter. We continue to work with the commission and interveners on our green tariff, a green energy product designed for municipalities and other large customers who want 100% renewable energy. Additionally, we have a number of smaller projects that we hope to grow in the future.
These efforts include three smart grid projects adjacent to substations being upgraded, six Electric Avenues, and a joint project with our local transit authorities, as well as plans to move forward on our five proposed energy storage projects. PGE customers and the region continue to push for further growth in renewables and carbon-free technologies. Portland placed tenth on a recent list ranking America's 100 greenest cities and was just named a winner in the Bloomberg American Cities Climate Challenge. Now I'm pleased to turn the call over to Jim. Thank you.
Thank you, Maria. As Maria mentioned, as shown on slide seven, we are affirming our full year 2018 earnings guidance of $2.25-$2.40 per diluted share. We currently expect to be towards the middle of this range. Turning to slide eight, which shows earnings drivers for the quarter. First, the Carty cash settlement increased earnings $0.10 per diluted share due to a $0.07 increase related to a $10 million pre-tax cash settlement proceeds and a $0.03 increase related to avoided carrying costs or carrying and litigation costs. Second, gross margin increased earnings by $0.04 due to a $0.06 increase as a result of higher wholesale electric prices 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 third quarter, 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 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 units 3 and 4. The testing has been completed, and the units have been operational since September. Moving to slide nine. 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% equity capital structure, and a rate base of $4.75 billion, which includes our customer information system. To the extent the rate base ends up being higher, we will manage our operating costs to provide a return on incremental capital. The average customer price increase is expected to be less than 1% 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 one, 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 third 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 30th, we had cash, available short-term credit, and letter of credit capacity totaling $861 million, first mortgage bond issuance capacity of $1.1 billion, 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 million, and commercial paper as needed. Now, operator, we're ready for questions.
Thank you. As a reminder, if you would like to ask a question at this time, please press the star and the 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from Christopher Turner with JPMorgan. Your line is open.
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. 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. It sounds like plenty of opportunities to invest. Clearly, you guys historically in providing us with CapEx updates and wanting to make sure there was visibility in your plan there. Is it fair to say that there would be no change to the dividend payout or 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. We continue to target the range of between 50% and about 70% of our earnings paid out each year.
Okay. Also a little bit of a longer-term question, looking beyond just this year, how do you think about load growth potential? 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?
That's a terrific question. We have talked in the last couple of quarters about our load growth. As we've noted, we're in a really admirable position to be in with regard to actually having load growth as a utility, we expect to actually have more going forward. Right now, we're looking at roughly about flat load, 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's growing at about 1.3%, we're seeing in-migration 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. 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 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. 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.
Morning, Julien.
Hey, good morning. Can you hear me?
Yep.
Yep.
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? I suppose I am asking that first with an eye towards the typical third quarter updates that you all provide around substations and distribution upgrades. 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 docket as well. Just want to make sure we are clear about the $500 million in 2018, 2019, and 2020.
How many questions was that, Chris? Or Julien? Sorry.
Sorry.
No, no worries. Just teasing you. As Maria had pointed out earlier, we take the CapEx budget to the board every third quarter, we have updated that and updated the disclosures associated with it. What we are trying to do is provide you more visibility into what we think things look like on a long-term basis. In doing that, it is into the items that we have continued to talk about. It is we have got a tremendous amount of customer growth that is going on in our system, so we are investing in those line extensions, those new substations that are required to support that industrial load that has been coming into our area. It is adding more capacity into the system to be able to deliver to those particular points where all the growth is continuing. We are continuing to invest in the environmental side of our infrastructure.
As we have talked about before, we have got a lot of transformers and some switchgear out there with PCBs in it that we are 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 have got thousands of miles worth of underground cable that we need to remove that are causing faults that are increasing our O&M expenditures for the company. The time our crews are out there chasing these types of faults. We are spending a lot of time and effort on those. We are also spending a lot of focus on resiliency of the system, from a cyber perspective, on the IT side, from being the systems that are in our offices to the systems that are out into the field.
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 Mount Hood that will impact our service territory as well. 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. 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 it's 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.
Julien, with regards to your specific question on generation, that relates to our Westside Hydro project. Jim mentioned seismic and related upgrades, and that is included in the 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 one 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.
Just to reconcile, or clarify rather, the typical distribution CapEx update cycle that you've done historically with third quarter, is that also reflected, or should we be expecting something more robust with fourth quarter here as well?
No, that's included now.
Yeah.
Okay. All right, George.
What we'll see is more visibility inside the company than we have in the past.
Got it. Thank you all very much.
Thanks, Julien.
Thank you.
Thank you. Your next question is from Insu 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 one of the Portland plans were to be selected, would the associated CapEx be purely incremental to what's shown in 2019 and 2020, or would there be some reshuffling potentially to get to a level that's not purely additive?
Insu, that'd be incremental to that plan.
Got it. Could you just provide a little bit more color on the mix of the PGE-owned renewable capacity that you guys had in your proposals and what kind of factors went into that mix?
Sure. We have a partner that we have been working with for some time on wind project development that also includes solar and battery storage. We have a mix roughly where we are doing about 36 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, Insu.
Thank you. Your next question comes from Paul Ridzon with KeyBank. Your line is open.
Good morning.
Good morning, Paul.
Quick question. 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's going into?
Not at this particular point in time, Paul.
Okay. Jim, I think you said you kind of felt comfortable with the middle of guidance?
Yes.
That implies kind of a weak fourth quarter. What are some of the things that are going to hit the fourth quarter?
It kind of goes back to the comments that Maria had made and I had made regarding power costs going into the fourth quarter. You've got the Enbridge gas issue up in Canada that is de-rating the amount of gas coming down the I-5 corridor. That's causing power prices to be a bit higher, and it's causing the gas prices in the I-5 corridor to be significantly higher. Gas, I think for tomorrow, is like $10 for the Sumas. That's going to be an issue. That, we are going into the winter season, storm restoration, we're expecting that to be a little bit of a challenge. 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 underappreciate is, given the volatility that we saw in energy markets in late July and early August, we took early action to drive to an earnings result and worked hard on our O&M under Jim's direction. That was possible largely because of the hard work that everyone put into it, but also the pretty good weather that we had. As we head into a much more challenging November and December from a weather situation, we'll have a lot higher storm restoration and other costs, which are more typical of a fourth quarter.
O&M was down markedly this quarter. 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 Carty at the same time.
Lastly, staff commented on your process in the RFP and had some questions. What's the next step there?
The next step is for us to work through the process of the short list. 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.
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?
The battery storage part is inclusive of the PPA section. We're working collaboratively with our partner. We have other battery storage projects that are ongoing at the company, total about a $44 million 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, microgrids, and then out at one of our generating plants.
Okay. That'd be separate from this renewable RFP?
Yes, it is separate.
Okay. Then, following up on a previous question I was going to ask about the split in that $500 million, 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?
Yeah, 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 areas as we go forward.
Okay.
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 a smart bi-directional grid, is really where we're focused our spending.
Okay. 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 on your thoughts around electric vehicles playing a role there? I know 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. We're doing a lot with regards to electric vehicles. We have the Electric Avenues that we are working collectively with our municipal partners on and creating additional charging opportunities for customers. We're doing a lot around education and working with car manufacturers and distributors as partners. Are really excited about the partnerships that we have with several of our local transit authorities. 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 where 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 Verition. Your line is open.
Hi, good morning.
Morning, Ashar.
How are you doing?
Good, thanks.
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 tax and A&G? Would this assume that weather was normal for the year? You had weak weather in the beginning and I know strong weather in the third, but is now like weather zero? 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, Shar, is Carty cash settlement that we had. That brought in $130 million and a $10 million reduction in our A&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 Colstrip units 3 and 4. 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 you look at right now in your forecast for the year?
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.
The trend in weather as well, trying to shorten that up given climate change.
Okay. Can I just follow up? If I read the Q correctly, you booked like $8 million and $1 million related to Carty before you stopped. At least it said year to date. Can I take then that $9 million 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 Carty that was in it, but then we got a positive, what is it, $0.10 or $0.12, right? Am I correct? In the net, the Carty 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, what we had was the $130 million settlement, after we looked at what was still on the books at above the $514 million that we had agreement with the commission on, that left us with eventually $10 million. We applied that $10 million to the A&G. What that did from an EPS perspective is that we had a one-time change of $0.07, and we avoided about $0.03 of additional cost going forward as we were continuing, or we would have had to have continued to chase that litigation absent the settlement.
Okay. I kind of get it. Can I just ask a better sense on depreciation? Depreciation increased by $30 million or so from 2017 to 2018. Is that the kind of run rate one should expect going forward?
Well, yeah.
It's a pretty high number, I thought just check in if you could give some anything in that regard.
Yeah, it is a little bit of an anomaly in there, in that you're seeing two 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 three-year period, about $52 million associated with the Trojan Nuclear Decommissioning Trust Fund. We were crediting back about $17 million annually, or $52 million total. 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.
The depreciation is more its normal level, what you're saying? It's okay.
Yes.
Okay. Because it went down because of them. Okay. I really appreciate your time. Thank you.
Okay.
Thank you.
Thanks, Ashar.
Thank you. As a reminder, to ask a question at this time, please press star, then one. Your next question comes from Vidula Marti with Avon Capital . Your line is open.
Good morning.
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 million and $200 million over 2019 and 2020.
Would I do that pro rata, or would that be back-end loaded, or 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. 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 this then translate into net rate base growth over on an annual basis if depreciation is running $380 or something like that, at least as of now, and CapEx is in as it's shown here right now. What does that translate to in terms of rate base growth?
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, would it be incorrect then to take, say, $500 million of capital in 2020, and I see a depreciation of $380, that would translate to $120 million of net rate base growth?
That's roughly how you would do the math.
Okay. All right. Thank you very much.
Thank you.
Thank you. We very much. Okay.
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 fourth quarter results in February 2019. 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.