Portland General Electric Co (POR) 2011 Q1 法說會逐字稿

Well good morning everyone and welcome to Portland General Electric Company's First Quarter 2011 Earnings Results Conference Call. Today is Thursday, May 5, 2011. 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 session. (Operator Instructions). And for opening remarks I would like to turn the conference over to Portland General Electric's Director of Investor Relations, Mr. Bill Valach. Please go ahead, Mr. Valach.

Thank you Kelsey and good morning everyone. We are pleased that you are able to join us today. Before we begin our discussion this morning I would like to make our customary statements regarding Portland General Electric's written and oral disclosures and commentary.

There will be statements in this call that are not based on historical facts 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-Qs. The Form 10-Q for the first quarter of 2011 was available this morning at PortlandGeneral.com.

The Company undertakes no obligation to update publically any forward-looking statements whether as a result of new information, future events, or otherwise. And this Safe Harbor statement should be incorporated as part of any transcript of this call.

Portland General Electric's first quarter earnings were released before the market opened today and the release is available at PortlandGeneral.com.

Leading our discussion today are Jim Piro, President and CEO, and Maria Pope, Senior Vice President of Finance, CFO and Treasurer. Jim will begin today's presentation by providing a general overview of the quarter's results and our strategic capital projects. Then Maria will provide more detail around the quarterly results and key regulatory proceedings. Following prepared remarks we will open the lines up for your questions. And now it is my pleasure to turn the call over to Jim.

Thank you, Bill. Good morning and thank you for joining us. Welcome to Portland General Electric's 2011 First Quarter Earnings Call. I'm very proud of our strong operating performance during the first quarter. Through effective power supply management we were able to economically displace a significant amount of our thermal generation with increased energy received from hydro resources and low cost purchase power. Our transmission and distribution system performed well and we continue to focus on cost efficiency and effectiveness, keeping our operating costs in-line with our 2011 general rate case. All while maintaining high levels of customer satisfaction.

PGE's net income for first quarter 2011 was $69 million or $0.92 per diluted share compared to $27 million or $0.36 per diluted share for first quarter 2010. We are increasing our full-year 2011 earnings guidance by $0.10 to $1.90 to $2.05 per share from the prior guidance of $1.80 to $1.95 per share. Increased guidance primarily reflects improved hydro conditions and lower purchase power costs.

Now let's move onto the economic outlook for our operating area. We continue to experience customer growth with the addition of 3,800 new customers since the first quarter of 2010. Oregon's seasonally-adjusted unemployment rate declined in March to 10% for the state and 9.6% for the Portland Metro area. This compared to the US average of 8.8% in March. Oregon's decline was due to an increase in job creation particularly with business employers.

Total retail energy deliveries on a weather-adjusted basis increased approximately 3.1% compared to first quarter 2010. While we experienced increases in delivery across all customer segments, the load increase was driven primarily by one large industrial customer in the paper sector and deliveries to high tech customers. We project that weather-adjusted retail energy deliveries for 2011 will be approximately 1% above 2010 levels which is the net of the expected impacts of energy efficiency efforts.

Now an update on our strategic initiatives starting with operational excellence. We continue to deliver excellent operating performance company-wide. Our system operated extremely well, our distribution reliability metrics remain strong. And although a considerable amount of thermal generation was economically displaced during much of the first quarter generating plant availability remained high.

In overall customer satisfaction we ranked in the top decile for residential and general business customers and in the top quartile for large industrial customers. Recently J.D. Power ranked PGE second in the region and fourth in the nation for overall satisfaction in their 2011 Electric Utility Business Customer Satisfaction Study.

I would also like to mention that Steve Hawke, Senior Vice President of Customer Service, Transmission and Distribution is retiring in July after 38 years with the company. Steve's dedication to customers and operational excellence helped the company achieve top industry rankings for system reliability and customer satisfaction. I would like to thank Steve for all he has done.

Bill Nicholson who has worked closely with Steve for many years will step into this role. Bill joined PGE in 1980 as a Generation Engineer. He was appointed to the Executive Team in 2007 to lead customers and economic development. And has served as Vice President of Distribution since 2009. I am confident that Bill has the broad experience and extensive knowledge to take on this important role.

Now an update on our future investments. I will begin with an update on our Boardman Coal Fire Plant. In December of 2010 the Oregon Environment Health Commission approved new rules as part of the State's implementation plan for regional haze for Boardman. The rules require installation of new emission controls and allow continued coal fired operations of Boardman through 2020. Under a separate set of rules PGE is required to install controls to eliminate 90% of mercury emissions. The total cost of all of the emission controls is estimated at approximately $60 million excluding AFDC.

The Environmental Protection Agency is expected to make a final decision on the State's implementation plan for Boardman by mid-2011.

In addition we submitted a regulatory filing with the OPUC in April requesting the recovery of increased depreciation expense reflecting a change in the retirement date of the Boardman Plant from 2040 to 2020. If approved, an approximate increase of less than 1% would be included in customer prices as early as July of this year.

In a separate federal rule making process the EPA is addressing national emission standards for a variety of hazardous air pollutants. Proposed maximum achievable control technology or MACT standards for these emissions were announced in March with approvals scheduled for later this year. We are currently evaluating the rules and have not yet determined whether we can meet all of the proposed standards with current and planned control technologies. PGE will continue to advocate within the EPA rule-making process to allow for innovative solutions like the Boardman 2020 plan under the MACT standards.

Now I will move onto our integrated resources plans, our IRP action plan which was acknowledged by the OPUC last November included meeting approximately 50% of future load growth through energy efficiency measures and meeting the remaining energy and capacity needs through new generation and transmission projects. To achieve the generation portion of the plan, we will conduct three separate competitive bidding processes to require the following resources. First, approximately 200 megawatts of year-round flexible peaking resources. This RFP will also seek additional seasonal peaking resources, approximately 200 megawatts of winter and summer peaking supply and approximately 150 megawatts of winter-only peaking supply. We plan to bring these resources online in the 2013 to 2015 timeframe.

Second, approximately 120 average megawatts of new renewable resources to help meet Oregon's renewable energy standards. We plan to bring these resources online as needed to meet Oregon's 2015 RES requirements of 15%. And finally approximately 300 megawatts to 500 megawatts of base load high efficiency natural gas generation. We plan to bring these resources online in the 2015 timeframe.

In each of the three competitive bidding processes we currently plan to include our own self-build option to compete with the market bids. In April the OPUC approved the section of the Axiom Group to act as the independent evaluator for the RFP processes. The process for the peaking resources will likely be completed in late 2011 or early 2012. The process for the new renewable resources will likely be completed by late 2012 or early 2013. And the process for the base load resources will likely be completed by mid-2012.

The IRP action plan also includes our Cascade Crossing Transmission Project. We have entered into MOUs with Bonneville Power Administration, PacifiCorp, Idaho Power and the Confederated Tribes of Warm Springs. Studies have begun on private and public land and the results will help determine the final route and facilitate the state, federal and tribal permitting processes.

Looking ahead to future capital expenditures, we will complete the RFP process and the results will provide better clarity on our equity and debt requirements. The amount and timing of future financing is dependent on the outcomes and timing of the competitive bidding processes, our Cascade Crossing Transmission Project, PGE's financial performance, and capital market conditions.

Now I would like to turn the call over to Maria Pope, our Chief Financial Officer, to discuss our financial and operating results in greater detail.

Good morning. Thank you, Jim. Today I will cover financial results for the quarter, review operating performance, provide an update on key regulatory items and conclude with our liquidity and financing.

First quarter 2011 net income was $69 million or $0.92 per diluted share compared to $27 million or $0.36 per diluted share for the first quarter of 2010. Operating results for the quarter were driven primarily by increased retail energy deliveries and decreased power costs. First quarter 2011 retail revenue increased 10% for first quarter of 2010. This increase was primarily due to a 10% increase in retail energy deliveries resulting from cooler than normal temperatures compared to unseasonably warm temperatures in the first quarter of 2010, and secondarily an increase in demand from our paper and high tech manufacturing customers.

For the first quarter of 2011 weather positively impacted results by approximately $0.05 per share compared to a negative impact of approximately $0.05 per share in the first quarter of 2010. Also contributing to the increase in retail revenue was a 3% increase in average retail prices and customer growth of 0.5% quarter-over-quarter.

Decoupling had a de minimis impact in the first quarter of 2011. This compares to a $5 million collection from customers recorded in the first quarter of 2010. Further offsetting revenue was an aggregate $10 million effect of regulatory items which were offset in other areas of the income statement.

Purchase power and fuel expense decreased 13% quarter-over-quarter due to a 19% decrease in average variable power costs, the increase in the amount of energy available for regional hydro resources contributed the average cost of purchase power being 41% lower than in the first quarter of 2010. To take advantage of lower market prices, PGE's thermal generation was economically displaced. Our thermal plants supplied 24% of PGE's total system load in the first quarter compared to 50% last year.

During the first quarter of 2011, PGE's generating plant's availability was 98% compared to 95% for the same period of 2010.

Now onto hydro. It has been cold and very wet in the Pacific Northwest during the first quarter of 2011. Energy received from PGE-owned and long-term contracted hydro resources was 16% above normal in the first quarter of 2011. This compares to a 21% below normal in the first quarter of 2010. With cooler than normal temperatures and increased precipitation, PGE received 40% more energy from Hydro generation quarter-over-quarter. Hydro generation received from both PGE-owned resources and long-term contracts positively impacted our financial performance by approximately $4 million pre-tax in the first quarter of 2011 compared to a negative impact of approximately $11 million pre-tax in the first quarter of 2010. With river runoff currently at 120% of normal, we expect energy received from hydro generation to be above normal for the full-year 2011.

Now on to wind. We have increased our installed wind generation with the completion of Biglow Canyon Wind Farm. By completing the last phase of the project, Biglow now has a total of 450 megawatts and of name play capacity. 2011 is the first benchmark year for Oregon's renewable energy standard. With the completion of Biglow Canyon we are supplying 10% to 11% of our retail load with RES qualified resources, well ahead of the 2011 5% benchmark.

I will now update you on a few regulatory items starting with the power cost adjustment mechanism or PCAM. For 2011 the PCAM deadband range is from 15 million below to 30 million above the baseline for your net variable power costs. Through March 31, actual net variable power costs were approximately 19 million below the baseline. This compares to being 7 million above the baseline in the first quarter of 2010. Net variable power costs for the year are currently estimated to be below the lower deadband threshold with PGE estimated to be, slightly exceed our regulated earnings [cap], an 11% return on equity. We have recorded an estimated refund to customers of approximately $4 million as of March 31.

Now I will move on to SB 408. In March, Senate Bill 967 was introduced into the Oregon legislature. The bill passed in the Senate in April and will now move to the floor of the House for a full vote which is expected to be on Monday May 9. If Senate Bill 967 is enacted into law it will repeal the annual tax true-up requirement. The OPUC would continue to calculate and include income taxes both current and deferred in regular rate-making proceedings. We will monitor SB 408 as it progresses through the House. Until the bill is fully enacted we will continue to apply the OPUC's SB 408 temporary rule that were issued in February 2011. For both 2010 and 2011 we estimate neither a material refund nor a collection from customers.

Now, onto financing and liquidity. We are active in the wholesale marketplace entering into forward contracts for natural gas and power to mitigate commodity price volatility for our customers. As of March 31 we posted $206 million in collateral with wholesale counterparties which consisted of $80 million in cash and $126 million in letters of credit. As contracts settle and as market prices remain unchanged we anticipate that about 57% of collateral posted will roll off by the end of 2011 which consists of approximately $87 million on letters of credit and $30 million in cash.

We have $600 million in revolving lines of credit, of which $453 million was available as of March 31. At the end of the first quarter we had no commercial paper outstanding and no direct draws on the revolver while we target a capital structure of 50% debt, 50% equity. Periodically we are higher or lower. On March 31 our equity ratio was 48%.

In 2011 we estimate capital expenditures will be approximately $310 million and estimate a similar level for 2012. These projected amounts do not include capital spending associated with Cascade Crossing or the RFP generation projects outlined in our IRP action plan as capital spending for construction of new generation resulting from the IRP competitive bidding process could begin mid-2012 at the earliest.

In closing, we continue to focus on financial objectives that support our core utility business and growth initiatives, including improved ROE and earnings performance, maintaining adequate liquidity, and a strong balance sheet to support our investment-grade credit rating.

Jim?

Thank you, Maria. First quarter of 2011 performance reflects our continued focus on operational excellence including flexibility and effectiveness in our power supply operations and prudent management of our operating costs. We are moving forward with implantation of our IRP action plan, and we will continue to position the Company for future investment opportunities that deliver value to our customers and a competitive return for our shareholders.

Operator, we'd now like to open the call for questions.

Absolutely. (Operator Instructions). And we will go first to Eric McCarthy with Praesidis Asset Management.

Hey, good morning.

Good morning, Eric.

Quick question. I know there is no such thing as a truly normal quarter when it comes to the variability of hydro, but if you could sort of quantify maybe the benefit that we got from not dispatching fossil as much and buying hydro and put it on sort of a normalized basis and the same with the sales?

That is a challenging question, but just to let you know there are two impacts of hydro. One is the increased generation at our hydro plants and the hydro contracts we have and then secondly when we have increased hydro in the region that drives down wholesale prices. So there is kind of a multiple effect of that. And Maria do you have any details of it?

Sure. As we mentioned the impact of the additional water flow on our hydro resources was about $4 million. And if you take a look and compare that to more normalized power prices in the region, had those been in effect the number would have been about twice that positive impact. So, about $8 million.

Okay, the increased dispatch from the hydro resources that we owned benefited us to the tune of about $4 million and --?

And if it had not been for the impact of hydro which would substantially reduce power prices in the Pacific Northwest as Jim mentioned, and we had more normalized those power prices over the quarter, you probably would have seen about double the impact from that hydro flow. So net about $8 million.

Okay And then what is the PCA deadband this year with which in before we have to start sharing with customers?

Sure. So as you know this was an initiative that we took on to reduce our risk on the downside at our last rate case and we now have deadband ranges which are between $15 million and $30 million. And as we mentioned we are roughly at about $19 million so we are estimating that we will be refunding to customers and sharing about $4 million for the quarter.

As a result of the last rate case, those deadbands are now fixed whereas prior to the last rate case they were kind of a moving target. And $15 million is on the good side, $30 million on the negative side.

Okay, so that can be broken out by quarter. If we sort of under-earn next quarter, it doesn't balance out over the quarter or the year?

It is a full-year test.

But it acts a little bit as a cushion.

Okay, and then just to confirm the sales were 10% overall but if we weather-adjust that that is about 3% to the better?

Yes. Quarter-over-quarter. And we are estimating about 1% for the full-year and just a cautionary note with regards to that, with the low power prices we have seen customers that are not on cost of service and impacting our bottom line pickup their usage. As Jim mentioned it was largely high tech and then one pulp and paper customer.

Okay, got it. Thank you.

Thanks Eric.

Our next question will come from Sarah Akers with Wells Fargo.

Hey, good morning.

Good morning, Sarah.

On the peaking RFP you have an online target date of 2013 to 2015. Can you comment on that timeframe and kind of what are the factors that would drive the need for a 2013 online date versus '15, or are there other factors like cost that come into place. And then also what is the online target date of Portland Self-build Option in the peaking RFP?

The timing of when those peaking resource comes on is really going to be dependent on what shows up in the RFP processes and when those resources may be available. To the extent someone already has excess capacity, willing to sell into the RFP, we would probably move sooner to acquire that because we do have a shortfall on capacity. But a lot of it is going to be dependent on the characteristics of each bid in the RFP and when those resources will be available.

Our general sense is if the self-build option were to be successful we would be looking at the late '13 early 2014 timeframe to get a new resource built. And that is assuming that the RFP gets completed by the first quarter of 2012.

Okay, great. And then switching to renewable, given the recent improvements for winter buying pricing, does that impact your plans or thinking on the timing of the new wind resources? And then related to that, can you discuss kind of your ability to use the RECs to meet the RES deadline and what factors you are considering that would determine whether or not you go that route?

Let's talk about the wind turbine. Yes, wind pricing, the pricing of wind turbines has kind of moderated a little bit just with the exchange rate impacts as well as just the market. Timing of the RFP for renewables is really dependent on us identifying a good self-build option. When we went through the RFP before for renew/renewables we didn't include a self-build option and we thought the bids just were way too high and too expensive for our customers given what we thought the market value for those types of resources were. So, one of the issues around the timing of the RFP for renewable is us being able to identify a good self-build option so that we can feel like we have a rigorous process to ensure that we get the best pricing for our customers.

So that is kind of where we are on that. And we have not yet identified that self-build option so we are still working on some alternatives and talking to developers about that. As to the RECs, in the last IRP process the Commission did want to explore our ability to use RECs to meet the RES standard and though we wouldn't do that to meet a large percentage of that standard, we could use it to fill in where we are short or where we have some holes in our commitments, our compliance commitments. So we are looking at that but my sense is those tend to be year-to-year and we would try and look at those as just a fill-in. But we are looking at RECs also as a way to meet our compliance requirements under the renewable energy standards.

Okay, great. Thanks.

Thanks Sarah.

We will now hear from Stefka Gerova with J.P. Morgan.

Good morning.

Stefka, your line is open. (Operator Instructions).

Sorry about that. Good morning and congratulations on strong results this quarter. I had a question about your assumptions for the full-year sales growth of 1%. And Maria you talked a little bit about that in your answer to Eric's question. But I am just kind of curious what your rational is behind that assumption given the strong pickup we have seen in the first quarter. And do you expect some of the pickup on the industrial side, whether that is from the pulp and paper customers or from the high tech customers to go away for the balance of the year to not be there?

Sure.

Let me just comment on the paper customer because what we work with -- we work with our paper customers to try to find opportunities for them to take advantage of low prices in the energy market. And so they can kind of scale their production up and down based on energy pricing to help them be more competitive. That is related to one of our paper customers. And so that can fluctuate their usage of our product. But as Maria mentioned it produces minimal margin for the company. So Maria do you want to give a little more detail on the overall load forecast?

Sure. And given the low market prices of power right now, we have made estimates for the full-year looking at the opportunistic usage that we probably saw pickup in the first quarter versus what is underlying economic growth. And we previously had expected flat load for 2011 and have revised our estimates up 1%. But we continue to see challenges within the economy. While job growth in Oregon has improved, and particularly versus the national average, we still are coming out of a very difficult recessionary period. And we believe that 1% is an appropriate number.

There have been some good announcements in our service territory. As you know Intel announced a major expansion in their facilities. The solar companies are doing well in their business model. So there have been some bright signs, but this is going to be a slow recovery as we work through this challenging period.

Okay, fair enough. And what was the sales assumption embedded in your last rate case?

It was roughly flat load from 2010 to 2011 which is our test year.

Okay, great. Thank you very much.

Thank you.

Thank you, Stefka.

(Operator Instructions).

I think we are done.

No further questions Mr. Valach.

Okay, thank you very much everyone for attending. We appreciate your interest in Portland General Electric and invite you to join us when we report on second quarter 2011 results. If you have any additional questions please contact Bill Valach who will be available after this call. Thank you again for joining us today.

Thank you. And again, ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation.