Portland General Electric Company
Q3 2013 Earnings Call Transcript

Published: 1 Nov 2013

[Operator:]

Good morning everyone and welcome to Portland General Electric Company’s Third Quarter 2013 Earnings Results Conference Call. Today is Friday, November 1, 2013. 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. (Operator Instructions) For opening remarks, I would like to turn the conference call over to Portland General Electric’s Director of Investor Relations, Mr. Bill Valach. Please go ahead, sir.

[Bill Valach:]

Thank you, Noah and good morning to everyone. And we are very pleased that you are able to join us this morning. Before we begin our discussion this morning, I would like to remind you that we have prepared a PowerPoint presentation to supplement our discussions today and we will be referencing those slides throughout the call and then for those of you accessing the call over the phone, those slides are available on our website at investors.portlandgeneral.com and it’s under the Events and Presentations tab. Referring to Slide 2, I’d also like to make our customary statements regarding Portland General Electric’s written and oral disclosures and commentary that there will be statements in this call are not based on historical facts and as such constitute forward-looking statements under current laws. These statements are subject to factors that may cause actual results to differ materially from the forward-looking statements made today and for 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. PGE’s third quarter earnings were released before the market opened today and the release is available on our website. The company undertakes no obligations to update publicly any forward-looking statements whether as a result of new information, future events or otherwise and the Safe Harbor statements should be incorporated as part of any transcript on this call. As shown on Slide 3, leading our discussions today are Jim Piro, President and CEO and Jim Lobdell, Senior Vice President of Finance, CFO and Treasurer. Jim Piro will begin today’s presentation by providing a review of our performance in the third quarter and an update on our strategic initiatives. Then Jim Lobdell will follow and will additional detail around the quarter’s results and our expectations for the remainder of 2013. Following these prepared remarks, we will open the lines up for your questions. And now, it’s my pleasure to turn the call over to Jim Piro.

[Jim Piro:]

Thanks Bill. Good morning and thank you for joining us. Welcome to Portland General Electric’s third quarter 2013 earnings call. I’d like to start with a brief update on our Board of Directors. On Wednesday, Corbin McNeill announced his retirement as Chairman of PGE’s Board of Directors effective October 31. Current board member, Jack Davis has been elected as the new Chairman. Corbin joined our board in 2004 and has provided outstanding leadership, perspective and guidance during his tenure as Chairman. Our company has benefited from his deep knowledge of and passion for the electric utility industry. On behalf of all our employees, I’d like to thank Corbin for a decade of dedication and service to our customers, shareholders and employees. We wish him well during his retirement. Our new Chairman, Jack Davis joined the board in June 2012 and brings extensive regulated utility experience to PGE. During his 35 years at Arizona Public Service Company, Jack held management positions in various areas of the company, including commercial operations, generation and transmission, customer service and power operations. He most recently served as Chief Executive Officer at Arizona Public Service Company for six years. Jack is a great asset for PGE and I look forward to working with him in his new role. Now, let’s move on to Slide 4. On today’s call, I will provide you an update on the construction of our new generation resources, summarize the progress we made on the 2014 general rate case, give you an update on our operations and discuss the economy in our service area. And Jim Lobdell will give you a financial update discussing the quarter’s results and our outlook for the remainder of 2013. As presented on Slide 5, we recorded net income of $31 million or $0.40 per share compared with net income of $38 million or $0.50 per share for the third quarter of 2012. Higher power costs primarily due to the three planned outages accounted for $0.06 per share and increased delivery system cost due to a service restoration work and the timing of other distribution expenses accounted for $0.04 per share. So let’s start with an update on the construction of our new generation resources. We have a successful track record of building generation plants. Our two most recent projects Port Westward Unit 1 and the Biglow Canyon Wind Farm were built on-time and on-budget and received full regulatory recovery. Similar to those projects, our three new generation projects have fixed price contracts with experienced contractors. So we are confident in our ability to bring these projects into service on-time and on-budget. Slide 6 provides detail on Port Westward Unit 2, a 220 megawatt natural gas plant located adjacent to our existing Port Westward Unit 1. Construction began earlier this year, engine pads and building foundations are complete and their reciprocating engines will be delivered to this site early next year. This project is on schedule and on budget and is expected to be operational in the first quarter of 2015. Slide 7 provides detail on the Tucannon River Wind Farm project, a 267 megawatt project located on 20,000 acres in Southeastern Washington. We broke ground in September and had been working on design, engineering and infrastructure development including road construction and turbine foundations. Tucannon River Wind Farm is on schedule and on budget and is expected to operational in the first half of 2015. The project will qualify for production tax credits. Lastly, Slide 8 provides details on the Carty Generation Station, a 440 megawatt natural gas plant that will be located next to our existing Boardman Plant. Design and engineering is well underway and we expect to break ground in early 2014. Project is on schedule and on budget and is expected to be operational in mid-2016. Slide 9 provides the summary of the company’s five year capital expenditure forecast. All together, the new generation projects along with our ongoing investment in our base business resulted in an average rate base of approximately $4.5 billion by 2017, an increase of $1.4 billion from our actual 2012 rate base. The new generation projects along with our continued investment in our base business are important to meet our customers’ needs through a liable service and efficiently generated power. Moving to the Slide 10, we filed the general rate case this past February based on the 2014 test year. With the recent stipulation on pension expense, I am pleased that we have now settled all items with the OPUC staff and interveners. PGE and parties have stipulated to a 9.75% ROE, a capital structure of 50% debt and 50% equity and an average rate base of $3.1 billion. We expect the commission to issue a final order in mid-December resulting in an average overall price increase from the general rate case of approximately 4% effective January 1, 2014. We have also joined other utilities to address long-term pension cost recovery and the power cost adjustment mechanism or PCAM and formal regulatory proceedings and we will update you on our progress as the information is available. Now for an operational update on Slide 11. As we previously disclosed three generation resources experienced outages in the third quarter of this year. Specifically the Boardman and Colstrip Unit 4 coal plants went offline on the July 1. Boardman which we operate came back online at the end of July as planned and has been operating at higher availability levels since it returned to service. Colstrip Unit 4 which is operated by PPL Montana will continue to be offline until early next year while its stator and rotor are being repaired. Our Coyote Springs natural gas-fired plant went offline in late August due to a crack in the steam turbine rotor. We put repairs are well underway and we expect Coyote Springs to come back on line later this month. PGE’s share of repair cost for the coal plant outages is expected to be covered by insurance, net of approximately $2 million in deductibles, which mostly will be capitalized. Repair costs for Coyote Springs are estimated to be about $2 million. Altogether, incremental replacement power cost in 2013 for these outages are expected to be between $16 million and $18 million. All three of these plants had been reliable sources of power for many years. And like Boardman, we expect Colstrip and Coyote Springs to resume their high availability levels once repairs are completed. Now, let’s move on to Slide 12 for an update on the economy and our customers. Oregon’s economy continues to show positive signs. Housing and commercial real estate market indicators are trending upward in our service area. Monthly sales, housing prices and residential building permits have all shown increases over the prior year and we are seeing increased commercial leasing activity. These economic indicators reflect future construction activity and customer growth in our service area. Oregon’s unemployment rate was 8.1% in August compared to 8.4% a year ago. The unemployment rate in our core operating area was 6.8% in August, down from 7.3% a year ago. Our manufacturing and high-tech industries also continue to grow. In September, Daimler Trucks announced their plans to expand its corporate headquarters in Portland and add 400 new jobs. Intel continues to build Phase 1 and Phase 2 of its D1X fab plan and its expansion also drives growth from suppliers serving the project. Looking ahead, our most recent power cost update to the Oregon Public Utility Commission included projected retail load growth of approximately 1% in 2014 primarily driven by a forecasted increase in energy deliveries to the industrial sectors as datacenters in companies like Daimler and Intel continue to expand and grow. Now, I would like to turn the call over to Jim Lobdell who will discuss our financial results for the third quarter and review our expectations for the remainder of the year. Jim?

[Jim Lobdell:]

Thanks Jim. Turning to Slide 13. For the third quarter of 2013, we recorded net income of $31 million or $0.40 per diluted share compared to net income of $38 million or $0.50 per diluted share for the third quarter of 2012. This decrease was driven by several pre-tax items. An $8 million increase in purchase power and fuel expense primarily due to the three plant outages that Jim mentioned. A $5 million increase in delivery system expense due to service restoration work and other plant expenses and a $7 million decrease in revenue related to the 2011 PCAM refund reduction in the third quarter of 2012. These items were partially offset by a $6 million benefit from increased AFDC on our new generation projects and investment gains on our benefit plan assets. Moving to Slide 14, total revenues for the quarter were $435 million, down $15 million from the same period last year. A small increase in retail energy deliveries was more than offset by a decrease in average retail prices. When adjusted for weather, energy deliveries were approximately flat quarter-over-quarter. Although we have seen growth in residential deliveries and steady deliveries to the commercial and industrial sectors during the year, energy demand is not growing at the rate we originally expected. Our year-to-date weather adjusted loads were also approximately flat compared to the first nine months of last year. And we expect this to continue for the balance of the year. Purchase power and fuel expense increased $8 million quarter-over-quarter driven by approximately $11 million of incremental replacement power cost for our plant outages in the third quarter of 2013. These outages drove net variable power costs above our 2013 annual power cost update tariff forecast for the third quarter. For the full year, including incremental replacement power cost for the three plant outages, we expect net variable power cost to be between the PCAM baseline and the upper deadband. Moving to Slide 15, production, distribution and administrative cost totaled $103 million this quarter, a $4 million higher – it was $4 million higher than the third quarter of 2012. While generation and maintenance expense decreased quarter-over-quarter, delivery system expense increased due to the timing of the plant maintenance, repair and IT work. In addition, pension expense increased $2 million quarter-over-quarter as expected, but was offset by lower employee incentives. For the full year, overall O&M is still on track to be within our forecasted range of $440 million and $460 million. Interest expense decreased $2 million quarter-over-quarter due to the timing of maturities and issuances of long-term debt. Further, AFDC debt is up $1 million and AFDC equity is up $2 million, reflecting increased CWIP from our three generating projects. On addition, we recognized a $2.6 million gain on our non-qualified benefit plan assets this quarter compared to a $200,000 gain in the third quarter of 2012. Lastly, income taxes decreased quarter-over-quarter as our lower taxable income decreased our effective tax rate to approximately 15% year-to-date. Now, turning to Slide 16. We continue to maintain a solid balance sheet, including investment grade credit ratings and strong liquidity. As of September 30, 2013, we had $787 million in cash and available credit and an equity percentage of 50.5%. In August, we issued 700,000 shares of common stock pursuant to the equity forward agreement we entered into in June for approximately $20 million in net proceeds. This brings our total shares outstanding to $78.1 million at the end of the third quarter. At this time, we do not expect to issue additional equity for the remainder of 2013. In regards to long-term debt, we entered into an agreement last month to issue an additional $155 million of first mortgage bonds in two tranches, a $105 million at 4.74% in November maturing in 2042 and $50 million at 12.84% in December maturing in 2048. We do not anticipate any further debt issuances this year. As we look ahead to 2014, we’ll continue to finance the construction of our generation projects with a combination of debt and equity targeting a 50-50 cap structure. At this point, we expect our equity issuances pursuant to the forward structure to be more weighted in the first half of the year and our debt issuances to be more weighted in the second half of the year. Now, let’s discuss our outlook for the remainder of 2013. As shown on Slide 17, we are reducing our 2013 earnings guidance from $1.25 to $1.40 per share to $1.20 to $1.30 per share. This decrease is driven by the incremental replacement power cost we are incurring for the Coyote Springs plant outage. Excluding the impacts of the $52 million expense for the Cascade Crossing Transmission Project and the $9 million expense for the customer billing matter which we disclosed last quarter, PGE’s full year operating earnings guidance for 2013 would be $1.70 to $1.80 per share. As Slide 18 displays our full year 2013 guidance includes the following assumptions

[Jim Piro:]

Thanks. While the generating plant outages have been challenging this year, I am pleased that the balance of the company’s operations have been very strong. Our performance and distribution reliability and customer satisfaction is top quartile. We reached a reasonable settlement on all issues in our 2014 general rate case. And we have made great progress on the construction of our three new generation resources to meet our customers’ needs. Now operator we are ready for questions.

[Operator:]

Thank you. (Operator Instructions) Let’s take our first question from Neil Mehta with Goldman Sachs.

[Jim Piro:]

Good morning Neil.

[Neil Mehta:]

Can you talk about when in the first quarter you are targeting Colstrip to actually come online? And is there rule of thumb for every month into 2014 what the economic impact would be?

[Jim Piro:]

We are looking at probably towards the end of January as the timing the plant will come back online. And it’s roughly around $2 million a year – a month from there – $2 million a month for replacement power costs. A lot of that will depend on hydro conditions next year as well as temperature in the region but that’s a good rule of thumb. But right now that’s what we are looking at.

[Neil Mehta:]

Alright and then just in terms of the outages have you done your own internal review how you thought about this being a structural, operational issue versus just a coincidence, unfortunate coincidence that we had three outages this year?

[Jim Piro:]

It’s really just – I think it’s just a coincidence. If you look at the history of these plants they had a long track record of high availability and Boardman was just a short outage, it was a failure of a valve that caused the problem. We have repaired that and made the correction and the plant is running well again. The Coyote Springs plant, if you look at it historically that plant is built I think in ’94 or so. It had a great record of running and the rotors had no problem, so this crack is very unusual to happen, but we have got the repairs and we don’t expect the problem going forward, plants that are really solid performer. And in Colstrip the same thing, we are still looking at the root cause of the failure. But it looks like just a one-off item that happened and just an unfortunate situation. But again when you look at the history of those plants they have all had a long track record of high availability.

[Jim Lobdell:]

Neil, to put a little bit finer point it’s been over 90% for these plants.

[Neil Mehta:]

Perfect. And then finally in terms of regulatory strategy can you go asset by asset from the RFPs and say – talk about how you are thinking about actually getting final recovery on each of those?

[Jim Lobdell:]

Here is our current thinking for regulatory strategy. Right now and we just had our Board meeting this week. We talked to our Board about this I think they are comfortable what our strategy which is file a general rate case in February of 2014 that would include both overall general cost increases to the extent there are any and then the inclusion of Port Westward Unit 2 and the Tucannon River Wind Farm in that filing. The rates for those projects would not go into service or would not go into customer prices until those plants go fully operational. And the price increase for Port Westward 2 is roughly in the 3% range and for Tucannon River Wind Farm is roughly in the 2% to 3% price range. We are still playing with the numbers a little bit. But not significant price increase a lot of that will depend on what power prices are as we kind of formalize next year’s forecast, but relatively small increases given the size of the resources going in. We will probably for Tucannon River Wind Farm some of the streams we are going to service in late 2014 we will use renewable adjustment clause to track in the further cost during 2014 for those streams that get completed. And then again we will put that plant into service and the customer prices when it goes fully operational probably late first quarter 2015. As for Carty the current schedule they have that plant come on in mid-2016. Again we would have to file a general rate case to include that in customer pricings. We haven’t decided exactly how we will do that whether we will run it full general for 2016 or is that your test year. We just have to look at what fits that project the best. The price increase there is somewhere between 6% and 7%. Again it will be dependent on gas prices and kind of what’s going on in the market at that time that’s kind of roughly what we are thinking about.

[Jim Piro:]

Thanks Neil.

[Operator:]

And we will take our next question from Paul Ridzon with KeyBanc.

[Paul Ridzon:]

Following on that question, when does Port Westward go on?

[Jim Piro:]

Port Westward Unit 2 will – it’s either – its right in the first quarter of 2015. It might be right in January. Things are going well in the construction assuming we have good construction weather and so forth. We would look like we will get that thing done in maybe even in 2014, but likely early 2015, January.

[Paul Ridzon:]

So, with that would you have put Westward and Tucannon in at the same time, as soon as one goes operational it goes in regardless of what’s happening at the other plant?

[Jim Piro:]

The plan right now is to basically put those prices into – put the costs into customers’ prices when the project becomes operational. We would happily certify to the commission that the plant is operational and then we would make a price change. The same thing with Tucannon and River Wind Farm, when it’s fully operational we would put into customer prices at that point. Using the rack to bridge that period of time till the plant goes fully operational for Tucannon River Wind Farm. So that’s the way we would do it. If the commission and the parties don’t want to go that direction on Tucannon River Wind Farm we could use the renewable adjustment clause in 2015 also, but we would rather not create a deferral that we have to recover in a subsequent period that is to put it right into customers’ prices.

[Paul Ridzon:]

And as far as financing your forward sales fully will meet the needs for the equity portion of these assets?

[Jim Lobdell:]

Yeah, between the equity forward that we have got and some additional first mortgage bonds financing, we should be able to cover everything we need to do in 2014.

[Paul Ridzon:]

But what about beyond ’14?

[Jim Lobdell:]

Beyond ‘14 really depends on what the capital needs of the company is. Whether if we have got additional capital projects that we need it will cover the three generating projects and then base CapEx.

[Paul Ridzon:]

Got it, okay, thank you very much.

[Operator:]

We will take our next question from Lauren Duke with Deutsche Bank.

[Lauren Duke:]

Good morning.

[Jim Piro:]

Good morning Lauren.

[Jim Lobdell:]

Good morning.

[Lauren Duke:]

So you mentioned weather adjusted sales kind of being flat year-to-date, what were weather adjusted sales kind of if you also adjust for the leap year, did you see a bigger uptake when you kind of adjusted for that impact?

[Jim Piro:]

It’s just about the same. There is not that much of a difference. You are just looking at the nine months versus looking at the quarter. We talked about that quite a bit on the prior call for the prior quarters also.

[Lauren Duke:]

Okay and in the third quarter did you see some improvement in sales that kind of helps give you confidence in your 2014 outlook?

[Jim Lobdell:]

Again we did see an increase and the – a slight increase and in the sales in the residential and commercial. What we are really looking at is what’s happening in the industrial sector. In that particular sector we are seeing a lot of movement in the high-tech area. We are seeing data centers are starting to pick up. But some of its just being overshadowed by the fact that we got some solar manufacturing that is causing a negative growth in our loads. But the nice thing is, nice but bad is the fact that’s becoming a smaller and smaller percentage. And so further reductions in that sector isn’t going to be as impactful.

[Jim Piro:]

Couple of other things, Lauren, We didn’t really talk about in the general rate case, they get extended decoupling mechanism for residential and small commercial and including the lost revenue effect. As you know we are pretty – we do a fair amount of energy efficiency in our service territory sometimes as much as 30 average megawatts. So that kind of reduces our load growth and kind of masks that there is actually growth going on which is being kind of overtaken or offset by energy efficiency by customers who are actually running a pretty aggressive LED in street lightening program right now which is a real great cost effective program for our customers that reduces energy usage, but also provides as an investment opportunity as we put those lights into service. So there is lot of things going on and it’s hard to kind of show that all in the numbers. And so that’s just something to take into account as you look at our numbers.

[Lauren Duke:]

Thank you very much guys.

[Jim Piro:]

Thanks Lauren.

[Jim Lobdell:]

Thanks.

[Operator:]

And we will take our next question from Sarah Akers from Wells Fargo.

[Sarah Akers:]

Hey, good morning.

[Jim Piro:]

Good morning Sarah.

[Jim Lobdell:]

Good morning Sarah.

[Sarah Akers:]

Hi, with the construction started on two of the RFP projects, are you able to give a better sense of how much of the remaining forward equity will be drawn down in ‘14 versus ‘15?

[Jim Lobdell:]

We think that we are going to pull down the balance of it in 2014.

[Sarah Akers:]

Okay. And you mentioned earlier that it would be first half of or earlier in the year versus latter?

[Jim Lobdell:]

Correct.

[Sarah Akers:]

Okay. And then as a follow-up to Neil’s question on Colstar I just want to make sure that the $2 million of incremental monthly power costs that you are – that you expect to see that should be embedded in the ’14 power costs forecast, so no impact on EPS in ’14 from the outage, correct?

[Jim Lobdell:]

No, actually it’s not to the extent that Colstar carries over into 2014 that’s not included in the annual update tariff because we have forced outage percentages. And so that will actually be a hit to EPS in the first quarter. So obviously we are very focused on bringing or helping PPL Montana bring that plant on time and back online with as little time as possible out.

[Sarah Akers:]

Got it, thanks a lot.

[Operator:]

We will take our next question from Andrew Weisel with Macquarie Capital.

[Andrew Weisel:]

Hi good morning. My first question is on Carty, your press release says that construction starts early next year, your Slide 8 shows $125 million of spending in 2013, can you help us understand what’s going into that $125 million before construction starts?

[Jim Piro:]

Yes, it’s part of the – as we have to start construction of the turbine and the generator and things with Mitsubishi. And so there is payments to the contractor to get that work started and completed or get it underway. So they are already starting to work on the turbine and the generator as well as just costs to do all the engineering and procure the equipment, so some of the prepayments are actually made before the equipment finally shows up on slide.

[Andrew Weisel:]

Okay, that makes sense. Then my other question is to follow with rate case in the books, can you give us an early look into next year what the trends might look like for O&M and D&A and how much of that will be recovered through revenues versus sort of a headwind for earnings?

[Jim Piro:]

So as I mentioned for ‘15, ‘14 is already covered in our rate case and so we just finished our budget for ‘14 and it’s totally aligned with what the rate cases projections are. So costs are fully aligned for ‘14. When we look at ‘15 we will file a general rate case because that’s the basis for recovering the new generating plants. We don’t expect a big increase in O&M between ‘14 and ‘15 basically just inflation.

[Andrew Weisel:]

Does that mean that in 2014 your increase in O&M as well as D&A will be roughly earnings neutral because the increase is fully recovered?

[Jim Piro:]

Yes, that’s correct.

[Andrew Weisel:]

Okay. Thank you.

[Operator:]

We will take our next question from Andy Levi with Avon Capital.

[Andy Levi:]

I am actually all set. Thank you very much.

[Jim Piro:]

Thank you.

[Jim Lobdell:]

Thanks.

[Operator:]

We will take our next question from Ashar Khan with Visium.

[Ashar Khan:]

Hi, good morning. May I just ask could you just help us out what would be the average share count in 2014?

[Jim Lobdell:]

Jim provided that before.

[Jim Piro:]

We haven’t provided that before. Really depending on the equity drive and the actual timing of that the number of shares that we issued in the forward structure are…

[Jim Lobdell:]

Was about $12.7 million.

[Jim Piro:]

Right. So we got 12.7 million shares we got issued. Prior to that we had about we had about 75 million shares of stock. And as Jim said we will draw that during the first half of the year, but we haven’t given exact time of that draw. But you are going to see those shares are about – those shares would all be added by the end of the second half of the year.

[Ashar Khan:]

So is that you would draw, should we think of it draw throughout the first six months or should we expect it all at one time, how should one think of it?

[Jim Piro:]

I would say it would be over the first six months of the year. That’s the beauty of the forward structure. We can draw as we needed to fund the cash flows in the construction. So we are not going to over draw and we will try to match it with the needs of the construction, which will then be covered through the AFDC calculation.

[Jim Lobdell:]

Yes, I mean to the extent that milestones associated with the projects move forward and move back which is timed appropriately with those.

[Ashar Khan:]

Okay. Thank you so much.

[Operator:]

And this does conclude today’s question-and-answer session. For any additional or closing remarks I would now like to turn it back to Jim Piro.

[Jim Piro:]

Thank you. We appreciate your interest in Portland General Electric and look forward to see many of you at EEI later this month. We also invite you to join us when we report our fourth quarter and full year 2013 results in February. Thanks a lot and have a great day.

[Operator:]

And this does conclude today’s conference. Thank you for your participation.