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Portland General Electric Co
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Good morning, everyone and welcome to the Portland General Electric Company Third Quarter 2018 Earnings Results Conference Call. Today is Friday, October 26, 2018. This call is being recorded. [Operator Instructions]
For the opening remarks, I will turn the conference call over to Portland General Electric's Director of Investor Relation and Treasury, Chris Liddle. Please go ahead, sir.
Thank you, Heather and 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-K and Form 10-Q. Portland General Electric's third quarter 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 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 and we continue to see benefits from in-migration and a healthy economy.
Turning to slide 4. 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 offset 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 cost 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 remains 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 to 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. We've recently submitted a shortlist of those proposals to the OPUC. The six bids from three bidders include the combinations of wind, solar and battery storage. Also on this program shortlist is PGEs third party joint bid for 36 hours megawatts of company-owned wind resources and a power purchase agreement for another 83 hours megawatt. 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 with the commission and interveners on our green tariff. The 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 includes 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, continues 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 seemed a winter 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 has shown on slide 7, we are firming 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 eight, which shows earnings drivers for the quarter. First, with Carty cash settlement increased earnings $0.10 cents per diluted share due to a $0.07 increase related to a $10 million pretax cash settlement proceeds, and a $0.03 increase related to avoided carrying costs – are carrying 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 $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 use the opportunity to lower natural -- opportunity of lower natural gas prices or higher electric wholesale prices to manage costs and help maintain the reliability of the systems. In particular, this helped to mitigate minimal wind output slightly below normal hydro production and thermal generation outages, largely due to a mission testing at the coal strips units 3 and 4. 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 the 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 that 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 whether in the load forecast. The 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 the slide 10, we provide a summary of the company's current capital expenditure forecast from 2018 to 2020, related to investments and support our continued customer growth, development of a more efficient, reliable and secure system. Managing these expenditures, we're moving to a rolling planning process that may result in more frequent updates toward capital forecast. We will continue to deliver our primary capital updates every third quarter. As shared in our previous calls, we’ve not included any capital expenditures in our forecast related to potential projects pursuant to our renewable RFP.
On the slide 11, we continue to maintain a solid balance sheet, including strong liquidity in investment the great credit ratings. As of September 30, 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 insurances of $75 million and commercial paper as needed.
And now operator, we're ready for questions.
[Operator Instructions] Your first question comes from Christopher Turner 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 to your cash return strategy to shareholders in the event that you do not end up owning any wins 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 our earnings to go overtime 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 trends coming up when you typically review that in the middle part of next year?
You're awfully right. We do review our dividend payout strategy, generally in the spring time and maybe and our board makes the announcement there after. And we continue to target the range of between 50% and about 70% of our earnings payout 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 low growth and as we've noted, we're in a really admirable position to be in with regard to actually having load growth in the 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. State’s 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 a accrue to customers?
No, we 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.
Yeah, and also, keep in mind, Chris, a lot of this growth that we're looking at on our future basis has to do with industrial loads
Got it. Great. Thanks, Jim and Maria.
Thank you. Your next question comes from Julien Dumoulin-Smith with Bank of America. Your line is open.
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 the first with an eye towards the typical third quarter updates that you all provide around substations and distribution upgrade. 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 RPF expect not, but want to reconcile that? And also with respect to the storage docket as well, just want to make sure we're clear about the $500 million and 18/19 too.
So, how many questions was that, Chris, Julien, sorry. No worries, just teasing you. So, as Maria had pointed out earlier we take the CapEx budget to the board every third quarter and we've updated that and updated other 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. 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 systems, so we're investing in those line extensions those new substations that are required to support that industrial load that’s been coming into our area. Yeah 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 switch gear 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&M expenditures of the companies for 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 perspectives on the IT sides, from being the systems that are in your offices, to the systems that are out into the field. And then as 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. 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 it’s in our side, in the operations, the 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 West Side hydro projects. Jim mentioned seismic and related upgrades and that is included in the generation areas. Many of those facilities are about 100 years old or more and we have been 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 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 third quarter. Is that also reflected or should we be expecting something more robust with fourth quarter here as well?
Nope that's included now.
Yeah. But what we’ll see is more visibility inside the company than we have in the past.
Got it. Thank you all very much.
Thank you. Your next question is from Insoo Kim with Goldman Sachs. Your line is open.
Turning to the CapEx plan that you guys have, I know the RFP is not currently in their place, if one of the Portland’s plans were to be selected with 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 purely additive?
Insoo, that I'd 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 PPA and owned renewable capacity that you guys have in your proposals and you know 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 are doing the or about 80 some odd megawatts. It's been terrific partnership and this 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.
Thank you. Your next question comes from Paul Ridzon with KeyBanc. Your line is open
A quick question, thank you for the CapEx update and we appreciate the more frequent dialogue. Do you envision maybe getting more granularity as to kind of the bucket set this capital is going into?
Not at this particular point in time Paul.
And then, Jim, I think you said you kind of felt comfortable with the middle of guidance. That implies kind of a weak fourth quarter. What are some of the things that are going to hit the fourth quarter?
Well, it kind of goes back to 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 degrading the amount of gas coming down the I-5 quarter, so that's causing power prices to be a bit higher and it's causing the gas prices and the I-5 quarter to be significantly higher. In gas, I think for tomorrow or for tomorrows like $10 for the [indiscernible] and so that's going to be an issue. 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 just got a few things to get done before you 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 and early August. We took early actions to drive to earnings results and worked hard on our O&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 a much more challenging November and December from 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 builds that?
It was driven by, it’s not just in a quarter, but it was driven by the plant outages there. You got to keep in mind that we had recorded the change or not the change, but the settlement associated with Carty at the same time.
And lastly, as just commented on the 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 were also beginning negotiations with all 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 million investment going forward.
In that case we're looking at putting battery storage in residential as attesting 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.
And then following up on our 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 we understood you answered 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 area as we go forward. We’re seeing as Jim has mentioned, we’re seeing substantial customer growth. We also have a catch up to do in terms of our resiliency environmental expenditures and really beginning to do the incremental steps that are smart bidirectional grid is really where we’ve focused our spending.
Then one higher level, as you looked out to 2022, you're putting together that CapEx budget and even more operational spending, imagine you're looking out there. Was there a specific allocation on your thoughts from electric vehicles playing a role there? And will they play a role throughout all the CapEx, but just wondering if it was large enough in your view looking out that far too actually be a specific allocation or some material amount directly related.
That's a really good question and we're doing a lot with regards to electric vehicle. We have electric avenues that we are working collectively with our municipal partners on and creating additional charging opportunities for customers for doing a lot around education and working with car manufacturers and distributors and partners. And I’m really excited about the partnerships that we have with our several of our local transit authorities. But none of that capital amounts to a significant amount to completely separate out at this point in time. We might get there in the future, but I think this will be -- we'll see all sorts of parties come together to make electric transportation really happen within our service area.
Okay. Great. Thanks so much. I appreciate it.
Thank you.
Thank you. Your next question comes from Ashar Khan with Visium.
Can I just ask as we picked 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 a strong weather in the third. But it's not like whether 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 Ashar, is Carty cash settlement that we had and that brought in $130 million, a $10 million reduction in our A&G costs, as it partially offsets 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’s units 3 and 4. And then as we were mentioning earlier we have the Enbridge Gas situation in the Pacific Northwest.
Could you quantify how much of normal would that end up in the year as you look at right now in your forecast for the year?
No, I couldn't that off the top of my head.
You know, 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 whether 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 trended weather as well, I’m trying to shorten that up, given our climate change.
Okay. And so then, can I just follow-up if I read the Q correctly, you booked like 8 million and 1 million related to Carty before it was stopped at leads it said year-to-date. So can I take then that 9 million or so an after-tax effect or 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? So, in the net the Carty really have to get 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 and after we looked at what was still on the books that above the $514 million that we had agreement with the commission on, that left us with eventually $10 million. And we applied that $10 million to the A&G. Now what that did from any EPS perspective is that we had a one-time charges 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 I kind of get it. And then can I just ask a better sense on depreciation. I mean, depreciation increased by like $30 million or so from $17 million to $18 million. Is that the kind of run rate one should expect going forward. [indiscernible] number but I thought just checking if you could give anything on that regards.
Yeah it is a little bit of an anomaly in there in that we not only -- you're seeing two things. One thing is you're seeing that capital additions a little higher than what 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 Spent Fuel decommissioning trust. So, we were crediting back about $17 million annually or $52 million total. So, it showed up as a reduction and depreciation in the past and it was also reflected in the revenue line as well. So, 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, its okay?
Yes.
Okay, because it was -- went down because of them. Okay I really appreciate your time. Thank you.
[Operator Instructions] Your next question comes from [indiscernible] Martin with Avon Capital. Your line is open.
A couple of things; one, can you remind me, since the capital program slide does not include potential wind RFP you know spending that if that were to come to pass, how that would be allocated? How much [indiscernible]
Sure. You could be looking at anywhere between $150 million and $200 million over 2019 and 2020.
Likely, that’s pro rata or would that be backend loaded or how would I want to spread that?
At this point in time it's too premature to speculate. I was just calling your own judgment.
Okay. And also I'm wondering if we just take a look at the capital program as it is, relative to deprecation of the gives and takes. What does that then translate into net rate based growth over on an annual basis if depreciation is running, you know like 380 or something like that, at least as of now and CapEx is in the, as its 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, you know we leave that up to you to do the math as we go forward.
Well, I mean, would it be incorrect then to take say $500 million of capital in 2020 and I see depreciation of 380 that 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.
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. 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.