Earnings Call: Q1 2018

Apr 27, 2018

Good morning, everyone, and welcome to Portland General Electric Company's First Quarter 2018 Earnings Results Conference Call. Today is Friday, April 27, 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 opening remarks, I will turn the conference over to Portland General Electric's Director of Investor Relations and Treasury, Chris Little. Please go ahead, sir. Thank you, Sabrina. 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 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 Q1 earnings were released via our earnings press release and the Form 10 Q before the market opens 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 Finance the 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, and thank you for joining us. Welcome to Portland General Electric's Q1 earnings call. On today's call, I will provide an update on our financial and operating performance, the economy in our service area, the status of our renewable request for proposal. I will then turn the call over to Jim, who'll provide more details on our financial performance and guidance. Now turning to Slide 4. We reported net income of $64,000,000 or $0.72 per diluted share compared with net income of $73,000,000 or 2017. Winter weather was significantly warmer than the prior year, which drove a quarter over quarter decrease in energy deliveries. This was partially offset by a decrease in distribution expense as a result of less storm driven system restoration and repair work. We are reaffirming our 2018 full year earnings guidance of $2.10 to $2.25 per diluted share. On Wednesday, PGE's Board of Directors approved our 12th consecutive annual dividend increase since we went public in 2006. The 6.6% increase reflects our commitment to providing competitive returns for investors, strong business fundamentals and long term growth as we increase our mix of clean energy and invest in a more resilient and secure grid. Now on to Slide 5 for operational and economic highlights. This month, as part of our ongoing commitment to providing customers with 100 percent clean energy, we filed an application with the Oregon Public Utility Commission, or OPUC, seeking approval for renewable for new renewable power options for large business and municipal customers. This program supports cost effective local and regional renewable power development by enabling customers to work with PGE to purchase directly from new solar, wind or renewable energy facilities. In addition, in February, we received OPUC approval for our transportation and electrification plan. Under this plan, PGE and TriMet, our local Mass Transit Authority are installing and managing new charging stations that will enable Oregon's 1st all electric bus rent. PGE is also expanding EV charging station infrastructure across our service area. I am pleased to share that PGE continues to be ranked in the top quartile for customer satisfaction for residential, business and key customers according to Market Strategies International and TQS Research. Additionally, we were again recognized as an environmental champion for 2018 according to MSI. Turning to the economic health of our service area. Unemployment remains stable at 3.6% with initial claim levels unseen since the late 80s early 90s. Population growth is 1.8%, largely fueled by immigration. As such, we are seeing an increase in billing permits of 12.3% compared to 4.5% nationally. Oregon also saw the largest percent increase from multifamily units permitted in 2017. And at 32 construction cranes, Portland has the most cranes per capita of reported U. S. Metropolitan areas. These strong economic indicators are driving total customer count growth of approximately 1.4% and gives us confidence in our long term load growth forecast of 1%. However, as we discussed on our last quarterly earnings call, we expect 2018 weather adjusted energy deliveries to decline up to 1%, in large part due to the closure of a large paper company in late 2017 and the impact of energy efficiency. Turning to Slide 6, I'd like to provide an update on our renewable request for propofol. Following the acknowledgments of the 100 average megawatt renewable need identified in our 2016 Integrated Resource Plan, we expect to issue a final RFP in early May, the proposals due by June. A short list of proposals should be finalized in October with a notice to proceed by the end of the year. And now I'm pleased to turn the call over to Jim. Thank you, Maria. Moving to Slide 7. As we shared on our Q4 call, we filed our 2019 general rate case with the OPUC in February of this year. We are currently in the discovery phase of the general rate case process with staff and intervenors opening testimonies due on June 6 followed by a settlement conference scheduled for June 18. Regulatory review of the 2019 GRC will continue throughout 2018 with the commission expected to issue a final order by the end of 2018. In regards to tax reform, are currently deferring the net benefits of the lower federal tax rate, which we expect to refund to customers over future periods. Turning to Slide 8, which shows our earnings driver for the quarter. 1st, gross margin decreased earnings by $0.18 due to the following: a $0.15 decrease due to an exceptionally cold winter in 2017 and a $0.03 decrease due to unfavorable weather in 2018. While January was warmer than normal, cooler than normal temperatures in February March helped to offset some of the unfavorable weather in January. 2nd, a $0.05 favorable increase related to distribution costs as no major storms occurred in the Q1 of 2018. The next driver is a $0.04 decrease due to lower generation maintenance cost and finally a $0.01 decrease in other miscellaneous items. On to Slide 9, we provide a summary of the company's current capital expenditure forecast from 2018 to 2022, which includes additional investments in 2018 as compared to our previous forecast. These expenditures are related we are making to support the continued customer growth and build a more efficient, reliable and secure system. For example, we're replacing and upgrading substations and other distribution and transmission equipment. As we identify opportunities for additional investments, we will incorporate them into our capital forecast when appropriate. As stated in our previous calls, we have not included any capital expenditures in our forecast related to cost projections and regulatory process, we now expect cost projections and regulatory process, we now expect energy storage expenditures would be approximately 50,000,000 dollars Onto Slide 10, we continue to maintain a solid balance sheet including strong liquidity and investment grade credit ratings. As of March 31, 2018, we had cash and then short term credit and available letter of credit capacity totaling 100 or $719,000,000 1st mortgage bond issuance capacity of $1,100,000,000 and a common equity ratio of 49.7 percent. In 2018, we expect to fund estimated capital requirements with cash from operations, the issuance of debt securities of up to $150,000,000 and commercial paper is needed. As shown on Slide 11, we are reaffirming our full year 2018 earnings guidance of $2.10 to $2.25 per diluted share based on the following assumptions. A decline in retail deliveries between 0% and 1% weather adjusted, normal hydro conditions for the remainder of the year based on current hydro forecast, wind generation for the remainder of the year based on 5 years of historical levels or forecast studies when historical data is not available, normal thermal plant operations for the remainder of the year, depreciation and amortization expense between $365,000,000 $385,000,000 and operating and maintenance expense between $575,000,000 $595,000,000 Our 2018 guidance assumes that the OPUC approval of the deferral application to capture the revenue requirement associated with our customer information system replacement project, which is expected to be placed in service during the Q2 of 2018. Please note that the equity return portion of the approved deferral of an approved deferral would not be recognized on the income statement until we begin amortizing. Back to you, Maria. Thanks, Jim. In closing, Oregonians and PGE are at the forefront of our transformation to a clean energy future. We remain committed to delivering safe, reliable, affordable, clean and secure energy. And now operator, we're ready for questions. Thank you. To get a little bit more color on your thinking and the Board's thinking behind the 6.6% dividend raise this week, it's towards the higher end of the past couple of years of raises that you guys have done, on our estimate, at least for this year, brings you kind of squarely in the upper half of your payout target range. But I wanted to kind of understand your thinking, a bit of longer term kind of context here on that? Sure. Thank you. So as the Board declared earlier this week 6.6 percent increase in our dividend. It really reflects the strong fundamentals of our business. 1st and foremost, a growing service territory. And as I mentioned in my earlier remarks, strong growth not only in terms of in migration into the state, customer load count, but also whether adjusted load long term looks very strong. Behind that is our investments in particularly in grid infrastructure as well as in clean energy and concern and focus on making sure that we are delivering value for all stakeholders and shareholders in particular. Okay. And implicit in that is or I should say, is there implicit in that any desire to not preserve capital for future needs a year or 2 down the road? And Jim can get into that further, but we feel confident in our capital availability at this point in time. Okay. Despite the 6.6% increase. Okay. And then my second question is on the CIS deferral. I heard your comments, Jim, but I wanted to make sure I understood them. You're saying that you guys will be able to defer basically the depreciation on that asset placed into service beginning in Q2 of this year, but no return would be deferred? And then also if you could just give us an update on maybe your conversations with interveners so far on that request? Well, we're going to we've got a request for the cost associated with the development of the CIS system. When it goes live in the Q2, we will file a deferral to capture the depreciation, amortization associated with that. And then we will have the conversation at the epicenter point in time with the interveners regarding the recovery of it. Okay. So it's basically too early to tell if we have a window into whether or not that would get approved? Yes. Okay, got it. Thank you. Thanks, Chris. Thank you. And the next question comes from the line of Michael Lapides with Goldman Sachs. Your line is now open. Hey, guys. Thank you for taking my question. Really 1 or 2, the increase in CapEx for this year, you've already filed the rate case. How do you get that CapEx into the rate case process? I mean, is that just a known and measurable filing or does that incremental $100,000,000 just hold over till the next time you file? Michael, those dollars are not factored into our general rate case filing for 2019. So it will be part of the decision making as to what we would do on a follow on filing. Got it. So there's no way to file an adjusted number during a known and measurable process? No. Okay. And you're Unless we want to restart the process and that's not something we're interested in. Got it. Totally understand. I want to make sure I understand and this is a little bit of housekeeping item. In your guidance, what do you assume is your kind of your tax rate for income statement purposes? The effective tax rate that we're assuming is somewhere between 11% to 15 percent. Okay. And that's for kind of the for the GAAP income statement. I'm trying to separate kind of income statement and cash flow, what you actually wind up paying in cash taxes? We're expecting to pay minimal cash taxes because of the fact that we've got the PTCs. Okay. And then finally on the storage and I want to check-in, you made some comments about the transportation electrification. And I know you've also been kind of contemplating and there's been a docket around energy storage. Can you talk a little bit about kind of when you think capital could be invested in either of those? And any ballpark around kind of what the impact on the capital budget of either of those two items could be? Sure. With regards to the electrification transportation projects that we have going on, it is not a lot of capital, Michael, but it will move us forward quite significantly in our partnership with TriMet, the regional transit authority here. And I would expect that we will see further capital expenditures in the next couple of years after this initial plan, which is largely sort of a smaller program. In terms of battery storage, we had previously had slightly higher indications of capital. We've gone up to $50,000,000 at this point in time. There's no significant change here, but rather that we're going through the normal regulatory processes and honing sort of where we are. Certainly, on the battery storage, in particular, we would like to be moving faster than the docketed process that we have and more aggressively. But again, this is the normal course sort of regulatory environment that we have. Yes. I mean, there's a whole sort of bunch of pilot programs that are involved in the battery storage. It's looking at putting batteries next to solar facilities. It's putting batteries in sub stations or next to capacity units, it's looking at micro grids and then looking at residential applications as well. So there's a lot of work that still needs to be done. Got it. Last item and just trying to think through to the renewable RFP. If you win that project and on a nameplate capacity, it's kind of roughly 300 megawatts or so. How do you think about how you finance that? So at this point in time, we are thinking that we can finance this with available cash from operations on additional debt as we move forward. It really just depends on the size the project. And as we all know, we still got a lot of process to go through to figure out exactly what it's going to look like in the end. We think it's going to be a very competitive process. So we're looking forward to that. Yes. Got it. Thank you, guys. Much appreciated. Thanks, Michael. Thank you. Thank you. And the next question will come from the line of Julien Dumoulin Smith. Your line is now open. Open. Hey, good morning. Good morning, Julien. Good morning. Hey. So I wanted to follow-up on a couple of items. First, with respect to the higher CapEx, can you elaborate a little bit on the timing of the update? I suppose typically we see the update with Q3 every year around these substations. Is it a new policy or should we still expect to see, get the latest sort of full plan delineated by Q3? Usually, Julien, you'll see it in the Q3. But as things we become aware of things and or they become to be more solid in our planning, then we'll include them in the updates. But typically, it would be the Q3. Got it. And can I read between the lines? I mean, this is like a customer growth piece of the equation that's driving the acceleration? So this would be investments in our operations for reliability, resiliency and certainly we're seeing a lot of customer growth in our area. Got it. All right. Excellent. And then just turning to the latest on the Oregon commission here. Is there any potential delays from the latest changes in composition given just the 2 remaining there? Or does that not really have any kind of meaningful impact operationally day to day in terms of the commission's ability to move forward? Or what does the tie even mean in terms of any of your pending dockets? I don't believe that there will be no, it's a great question, Julien. I don't believe there will be any delay. There. The governor is contemplating names that she will put forth to the legislature probably by the end of today or early next week to fill the vacant spots. Commissioner Decker has already been named Chair of the Commission to replace Commissioner Hardie, who has announced her desire to resign this spring. Got it. All right. Excellent. Good to hear. And then lastly, just to reconcile the renewables procurement, is there a potential that it's multiple projects? Or is this really going to be fixated on just a single project here as you think about the, call it, nameplate 300 megawatts? We really don't know. Clearly, economies of scale would favor a larger project, but we could also see multiple projects being bid in that would be very competitive. As Jim mentioned, it will be a competitive process. Right. Absolutely. And it's not known necessarily if you're necessarily partnering with anyone specifically or it's not necessarily necessary yet either, right? You don't necessarily need to identify any build on transfer opportunities until after perhaps the initial, I suppose, proposals come out? Well, the only thing that we have put out there publicly, Julian, is the fact that we've got a benchmark project that we are proposing to put into the RFP process. We find that when we do that, the process becomes very, very competitive and we get great prices for our customers, great investment opportunities. Excellent. I'll leave it there. Thank you all. Take care. Thanks. Thank you. And the next question comes from the line of Paul Ridzon with KeyBanc. Your line is now open. Thank you. How much of the how much of a drag is a loss of the paper? How much of that 1% is driven by that? Loss of the paper? This is a paper company. Loss of the you mean a drag in earnings, a drag in load? Load growth. We haven't shared that. That would be giving out customer information. Okay. But it's not insignificant. Yes. So it was a significant change year to year. Right. Yes. And then what was the wind capacity factor for the quarter? I think it was about 31%, 32%. It was up quite a bit in the quarter, primarily because last year's Q1 was significantly below normal at about 19%. And what's the 15 year historic number? What's normal? We're still trying to figure that one out. Sorry, you flip it, but we haven't seen what we thought would be normal for the last several years. So we're starting to see things start to coalesce, but I think we got a little bit more of a track record to go. And then what's the structural regulatory lag in basis points that you're thinking about? It's about well, on a dollar amount or on a percentage of basis points. I mean, on a dollar amount go ahead, Paul. Basis points would be actually more helpful. Yes, I'd say it's more around 70 basis points. Any actions you could do to kind of work that down? Or is that kind of probably stuck there for a while? We're continuing to look at it to see if there are ways to get a better cost recovery of the items that are included in that. So that's an ongoing project and ongoing conversation that we have with the commission. Actually, I would make it I'm going to correct my statement on basis points. It's more around 80 basis points to 85 basis points right now. It represents about $29,000,000 excluding Cardi. Okay. Thank you very much. And that's keep in mind that's pretax. Okay. Understood. Thanks. Hi, good morning. I just wanted to get a sense of the weather adjusted decline in retail deliveries for the quarter, especially since you're reiterating guidance with up to 1% decline in retail deliveries for the year? Actually, the for loads on a weather adjusted basis for the quarter, they were actually up 0.5%. I mean, if you look and Maria had mentioned this earlier, when you look back behind it, residential was up about 1.2% on a weather adjusted basis, driven by about 1.4% customer count increase. That was partially offset by energy efficiency out there. Commercial was down about 1 point 4%, weather adjusted, and we just got a weakness in a few sectors. And then industrial was up about 2 point 4%. That was more or less fueled by the high-tech sector, which would be more on the semiconductor side. Perfect. And then, can you give us an update on the cardiology litigation? I don't know if there is any update on the timeframe. No, not at this particular point in time. We had an arbitration in front of a panel early this month and it was to figure out are the claims arbitable in front of the International Commerce Commission and who the parties would be. We won't know the outcome of that for a while. And so until we hear something from that panel, I think we're just kind of on hold. Okay, perfect. And just what would you expect the hydro conditions to be throughout the year? Right, Nat? We're looking at about normal. Yes. Okay. Okay. Thank you so much. Thanks. Have a good day. Bye bye. Thank you. And our next question will come from the line of Travis Miller with Morningstar. Your line is now open. Good morning. Thank you. Good morning, Travis. You answered my dividend question and one of my tax questions. So I'll have to try another one here on the tax side. Given the PTCs and you had mentioned that cash tax position, how long can you go again given the PTCs and you've got obviously a nice DTL to return to customers, how long can you go do you think with essentially no cash tax position? It's going to be quite a while. I can't tell you the exact number of years out into the future. But what I will say is with the production of continuing production of PTCs, we will use them as generated and we don't believe that we will see any of them expire. Our last generation of our protection tax credits is in 2024. Yes. Okay. And those can cover that plus the return of whatever cash on the DTLs could cover a substantial amount of the GAAP tax? Yes. About 75% of your taxable income or your tax can be covered with DTCs. Okay. Okay. That's all I had. Okay. Good talking to you, Travis. Yes. Thank you. And the next question will come from the line of Michael Lapides with Goldman Sachs. Your line is now open. Hey, Tim. Just housekeeping on the structural lag, that $29,000,000 that's a pre tax number. So using your really low tax rate, you're talking about $25,000,000 $24,000,000 $25,000,000 on an after tax basis. Has that changed much in the last couple of years? Yes, it's gone up slightly, but not a lot. Michael, one of the most significant things that Jim has done in the rate case is request full volumetric decoupling for weather and then also storm restoration recovery. So while that while we normally don't think of those as part of structural lag, that's a really important part of our rate case as we move forward and not uncommon for utilities across the country that experience a significant weather patterns as we do in Oregon. Got it. Okay. Thank you, guys. Much appreciated. Thank you. And the next question comes from the line of Kevin Fallon with Citadel. Your line is now open. Hey, guys. Could you quantify what the weather impact in the first quarter was versus normal? The weather impact in the first quarter was about $0.03 Okay. And I thought you guys had said on the Q4 call that you had baked in an $0.11 hit into the guidance and it came in much better than that? Is there some other driver that has materialized? No, we did. We said 0.11 dollars and now you've got about $0.03 that has showed up in the Q1. And that's you got to keep in mind weather is just degree days. But we're at this particular point in time, we've got too much of a year ahead of us before we're willing to consider any other look at our guidance. Okay. That's fair. And it also said in the Q that you guys had an unplanned outage at Boardman. Was that a material event? No. Okay. No. It took place in the Q4 of 2017 and will continue for a little bit longer, but it's not material at all. In fact, it's attributed to the results we have. And on the storage investment that you guys are making, does that come with rider recovery? You mean, what we are asking for as part of that process is the ability to use the renewable adjustment clause to recover the costs associated with those investments. Okay. So on that's about half of the increase. Is there is the other increase the other 50,000,000 ish need to be recovered in a GRC? Kevin, when we look at the up to $50,000,000 that we're anticipating associated with all of the pilot projects for energy storage, it's to say with all of those dollars, we're anticipating the use of the renewable adjustment clause, which would allow us to be able to track that into customer prices. Okay. That's very helpful. And last thing, when are you guys expecting the commission that until, let's see, see that until let's see. We will be filing it this quarter and there's no statutory time limit associated with it. So it's going to be a while. But as it's pending, you're allowed to effectively run it through the financials as if it's been granted? Yes. Okay. Thank you very much. All right. Thanks, Kevin. Thank you. Thank you. I'm showing no further questions at this time. I would now like to turn the conference back over to Ms. Maria Pope for any closing remarks. Thank you. We appreciate your interest in Portland General Electric, and we invite you to join us when we report our Q2 2018 results in late July. Have a great day. Ladies and gentlemen, thank you for participating in today's conference. This concludes your program. You may all disconnect. Everyone have a great day.