Portland General Electric Co (POR) 2011 Q3 法說會逐字稿

Good morning, everyone, and welcome to Portland General Electric Company's Third Quarter 2011 Earnings Results Conference Call. Today is Thursday, November 3rd, 2011. 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.

Thank you, Jay and good morning, everyone, and we're very pleased that you're able to join us today. Before we begin our discussion this morning I'd 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 third quarter 2011 was available this morning at PortlandGeneral.com.

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 any part - as part of any transcript of this call.

Portland General Electric's third 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 for your questions and now it's 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 Third Quarter Earnings Call.

We delivered strong operational performance in all sectors of our business during the quarter. As a result of the continued increase in energy received from hydro resources, combined with low cost purchase power, we were also able to effectively manage our power supply and economically displace a significant amount of our thermal generation.

We also continue to move forward to implement our business strategy to meet the growing energy needs of our customers.

Now onto the quarter's results. PGE's net income for third quarter 2011 was $27 million or $0.36 per diluted share, compared to $49 million or $0.65 per diluted share for the third quarter 2010.

It is important to note that there were some non recurring items that positively impacted the third quarter last year, with the most significant being $20 million pretax collection for SB408. This amount was reversed in the fourth quarter 2010. We are reaffirming our full year 2011 earnings guidance of $1.90 to $2.05 per diluted share and plan to provide 2012 earnings guidance in our fourth quarter earnings release scheduled for February of next year.

Now, let's move on to the economic outlook in our operating area.

We continued to see customer growth with the addition of 2400 new customers since the third quarter of 2010. According to the Oregon Employment Department, Oregon's seasonally adjusted unemployment rate remained flat at 9.6% in September. This compares to the US average of 9.1%.

Oregon's private sector payroll grew faster than the national average with growth of 2.3% in the last nine months compared to the same period last year versus 1.6% for the US.

The Oregon Office of Economic Analysis forecast that jobs in Oregon will continue to grow faster than the US average during the next several years. Growth is likely to be concentrated in higher wage jobs reflecting activity in high technology manufacturing as illustrated by the substantial expansion project currently underway at Intel.

Including the effects of energy efficiency measures, PGE's weather adjusted retail energy deliveries increased approximately 0.7% in the third quarter 2011 compared to third quarter 2010. This increase was driven by growth in the industrial sector, specifically the paper production industry. Excluding two large paper companies, total weather adjusted deliveries for the quarter would have declined 0.4% compared to 2010.

This decline driven by lower than anticipated residential loads during July and August has led us to revise our projected weather adjusted deliveries for the full year of 2011, from an increase of 1% to an increase of approximately 0.5%. This again excludes the impacts of the two large paper production customers noted previously, one of which has access to the wholesale market through PGE at prevailing market prices.

While weather adjusted residential demand began to increase again in September, we do not believe growth over the remainder of the year will make up for the reduced demand during the summer.

The revenue impact of reduced loads during the third quarter is partially offset by our decoupling mechanism, which Maria will discuss later.

Now, an update on our strategic initiative, starting with operational excellence. We continued to deliver excellent operating performance companywide during the third quarter. Our distribution reliability metrics remained strong and generation plan availability was high.

The gas turbine upgrade we completed during the second quarter at our Coyote Springs plant is performing at a higher level than expected with a 12% increase in production versus our expectation of approximately 7%. We also continue to maintain high levels of customer satisfaction. Based on third quarter results, we continue to rank in the top quartile for overall customer satisfaction among residential and general business customers and in the top decile for large industrial customers.

Our leadership team continues to put a special emphasis on operational improvements and sustainable cost efficiencies for the long term. We are meeting early milestones on a number of initiatives already underway. These companywide programs are focused on streamlining operations by leveraging technology and refining work processes. Our goal is to reduce the cost of service we provide to our customers while maintaining top quartile customer satisfaction.

Now, an update on our resource strategy starting with an update on Boardman. We continue to make progress on the Boardman 20/20 plan to address the new air emission requirements at our coal fired facility. New low NOx burners installed this spring to reduce nitrogen oxide emissions are functioning well. Retrofits to control mercury emissions have also performed well in testing this fall. We expect to place the mercury control system in full operations late this year or early next year.

We are awaiting action on the EPA utility MACT rules. PGE and others submitted comments to EPA this summer regarding the compatibility of the agency's proposed rules with our Boardman 20/20 plan. EPA recently requested a one month extension to December 16th to issue those final rules.

Now, I'll move on to our integrated resource plan, which the Oregon Public Utility Commission acknowledged last November. Our IRP action plan includes energy efficiency measures as well as the addition of new renewable resources, gas fired base load and peaking generation and transmissions to meet our retail load requirements. We submitted a draft request for proposal for capacity resources to the OPUC in July and plan to submit separate RFPs for energy and new renewable resources.

However, the OPUC issued an order in September directing us to combine our capacity and energy RFPs. We expect this to delay the decision on both the capacity and energy resources by six to 12 months and we will work collaboratively with the commission and stakeholders to determine the most effective structure for the combined RFP. We still expect the combined RFP to include PGE benchmark resources to compete with other market bids.

In the meantime, preparations are also underway to present a draft RFP for renewable resources to the commission for approval, which should result in a short list of potential renewable projects by mid 2012. We intend to bring the selected resources online as needed to meet Oregon's Renewable Portfolio Standard requirements for 2015. PGE plans to include a benchmark resource in this RFP as well.

The IRP action plan also includes our Cascade Crossing transmission project. We've been working with stakeholders in the region to plan the project and are preparing to file a site certificate application with the state of Oregon in the first quarter of 2012. Subject to obtaining all necessary approvals, the project is expected to be in service in late 2016 or early 2017.

We are pleased that President Obama's administration recently named the Cascade Crossing project as one of seven grid modernization pilot projects to participate in a new federal rapid response team projects. The goal of the rapid response team is to streamline federal permitting and increase cooperation at the federal, state and tribal levels.

Cascade Crossing's inclusion reflects the projects importance to our region as well as the collaborative approach we've already put in place with government agencies and other regional utilities to address planning and permitting requirements.

Our future equity and debt financing needs will be driven by the structure and timing of these projects I've just discussed.

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

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

Third quarter 2011 net income was $27 million or $0.36 per dilute share, compared to $49 million or $0.65 per diluted share for the third quarter of 2010. This decrease is primarily due to a pre-tax $20 million collection recorded in the third quarter of 2010 related to the regulatory treatment of income taxes under Senate Bill 408. This collection was reversed in the fourth quarter of 2010 and as you know, Senate Bill 408 is now behind us.

Net income was also impacted by a pre-tax $4 million loss related to a decline in the fair value of non qualified benefit plan trust assets in the third quarter of 2011 compared to a pre-tax $3 million gain in the third quarter of 2010.

Excluding the decrease for Senate Bill 408, total operating revenues for the third quarter were largely flat compared to the third quarter of 2010. A 3.9% price increase authorized in the 2011 general rate case and a 1% price increase related to the shortened operating life and decommissioning costs of the Boardman coal plant resulted in a revenue increase of $14 million.

Additionally, retail energy deliveries increased approximately 5 million. These amounts were offset by several items, including a power cost adjustment mechanism or PCAM, refund of $4 million in the third quarter of 2011, a refund reversal of $6 million in the third quarter of 2010 and the renewable adjustment clause revenue requirement increase of $8 million in the third quarter of 2010, related to Biglow Canyon phase three coming online.

Decoupling is working as expected with residential use down in the third quarter of 2011. We recorded a $1 million collection compared to no collection or refund in the third quarter of 2010. This partially offsets the revenue impact of reduced loads that Jim mentioned earlier.

In the third quarter of 2011 PGE received 24% more energy from PGE owned and contracted hydro resources than in the third quarter of last year, as river runoff has averaged significantly above normal. Overall, purchase power and fuel expense decreased 10% quarter over quarter.

With abundant hydro in the northwest, wholesale market prices were low; consequently we economically displaced a significant amount of our thermal generation with wholesale power purchases. As a result, thermal generation supplied only 35% of retail loads in the third quarter of 2011, compared to 50% of retail loads in the same period of 2010.

Excluding impacts of the portion of power costs refunded to customers, PGE owned and contracted hydro generation resulted in a positive pretax impact of approximately 4 million in the third quarter of 2011 compared to a negative pretax impact of approximately 3 million in the third quarter of 2010.

Wind generation provided 8% of PGE's retail load requirements in the third quarter of this year compared to 7% in the third quarter of last year. This increase was primarily due to the completion of the final phase of Biglow Canyon in August of last year.

PGE has several sites that qualify under Oregon's Renewable Portfolio Standard. These include the Biglow Canyon, two contracted generation sites and 50 average megawatts of low impact hydro. We expect renewable generation from these sites to supply approximately 10% of our retail requirements in 2011.

Now, I'll update you on a few regulatory items. For 2011 the PCAM dead range is from $15 million below to $30 million above the baseline for net variable power costs, after which a 90/10 sharing occurs. As we've discussed, favorable hydro conditions and low cost wholesales power resulted in actual net variable power costs being approximately $36 million below the baseline for the first nine months of 2011. This compares to $11 million below the baseline for the first nine months of 2010.

Under the PCAM, as net variable power costs are below the dead band and we are expected to exceed an 11% regulated return on equity, we have recorded an estimated power cost refund to customers of $16.5 million year to date of which $4 million was reported in the first quarter and $8 million in the second quarter. And the third quarter refund would have been approximately $7 million, however the 11% regulated ROE earning test reduced our refund for the quarter to approximately $4 million.

PGE filed our estimates of power costs for 2012 earlier this year. Yesterday the OPUC issued an order on the 2012 annual power cost update tariff or AUT, which resulted in less than a half a percent change from our original filing and approximately a 1% decrease in customer prices effective January 1st, 2012.

Now, I'll move on to operations and maintenance expenses. Third quarter O&M expenses were up as forecasted in the 2011 general rate case. Production and distribution expense increased $8 million in the third quarter 2011 compared to the third quarter last year, driven by labor and material expenses, related to planned operating and maintenance at our thermal plants and increased information technology costs.

In addition, administrative and general expense increased $8 million quarter over quarter, primarily from the increased legal fees, higher employee benefit expenses and incentive compensation.

Now, onto financing and liquidity. We are active in the wholesale marketplace, entering into forward contracts for a natural gas and power to manage our exposure to commodity price risk and minimize volatility for our customers.

As of September 30th, we posted approximately $151 million in collateral with wholesale counterparties, which consisted of $83 million in tax and $68 million in letters of credit. This compares to approximately $354 million in collateral posted with wholesale counterparties as of September 30th, 2010.

We have $600 million in revolving lines of credit, of which $511 million were available at this September 30th. Including the addition of $97 million in cash, our total liquidity at the end of the third quarter was $608 million. While we target a capital structure of 50% debt and 50% equity, periodically we are higher or lower. As of September 30th our equity ratio was 48%.

We estimate capital expenditures and preliminary engineering to be approximately $300 million in 2011 and about the same for 2012.

In closing, we continue to focus on financial objectives that support our core utility business, earning a more competitive return on equity and maintaining a strong balance sheet to support our investment grade credit rating. Thank you. Jim?

Thank you, Maria. Third quarter 2011 performance reflects our focus on operational excellence including continued flexibility in our power supply operations, high customer satisfaction and prudent management of our operating costs. We are moving forward with implementation of our Boardman 2020 plan as well as 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 would now like to open the call for questions.

(Operator instructions). And we'll go first to Sara Akers with Wells Fargo.

Hey, good morning.

Morning, Sara.

Can you talk about the revised schedule for the RFP? I know you said that the combined will put about a six to 12 month delay, but in terms of - if you're winning - if your self-build option is a winning bid, when is the earliest you can begin construction on a peaking gas unit under the revised timeline?

So here's generally the scheduled we're looking at and I'll start with the combined capacity and energy RFP. We would hope to issue the draft RFP to the commission probably by the end of the year. We're still working on trying to put those two RFPs together and get all the language developed. Then, it's going to take at least about a quarter, we hoped, for the commission to issue an order on that RFP and that's really the wild card is how long it takes to get through that regulatory process.

But if by the end of the first quarter the PUC has rendered a decision on the RFP, we would then start the process with the hope that the - by the end of the second quarter we might have a short list. So that's kind of generally what we're looking at for the combined capacity in energy resource.

In terms of the timing of the projects, obviously we'd have to win the bid first to have a - to give you better clarity on when we would start construction, but right now I think the plan would be to add the capacity resource first and then followed by the energy resource. So we've allowed certain timeframes for those projects to come online and a lot of that will depend on what comes through the bidding process.

On the renewable RFP again, we would hope to issue a draft RFP to the commission by the end of the year, again by the end of the second - by the end of the first quarter we would hope to again have a commission decision on that RFP at which point we would start that RFP process. And again, we would hope by the middle of the year or the end of the second quarter to have a short list of renewable - short list of projects for that renewable RFP.

So the process is still very fluid. The big wildcard is how long it's going to take the commission to get through the process and issue a decision on the appropriateness of the RFP so that we can then start the process.

On the renewable side, the goals we're trying to hit is by 2015 we have to get to 15% renewables and so we will add those selected resources as necessary to meet that 15%. Again, in the renewable RFP we are planning to put a self-build option in to compete with market bids.

Thank you very much. And then quickly on Cascade Crossing, how much of that project is - or how much would your CapEx be of that project?

You know the project is somewhere between $800 million to $1 billion and really depends on whether we build a single circuit or a double circuit line and if we build a double circuit line, we would likely have a partner in the project that would take some of the capacity. As we've mentioned before, we have been in discussions with Pacific Corps and they do have interest in a share of the line. We're also working with Bonneville Power on their interest in the line and what capacity they might want on that line. So much of that commercial discussion is going on.

So, if it's a single circuit line, just for our needs, it would be somewhere in the $800 million range. Double circuit would be $1 billion but then we would take up - we wouldn't take the whole project down there. There'd be other partners that would have a share of the project.

So we're still kind of in the fluid state of trying to figure out exactly the commercial operation, commercial arrangements with the various counterparties and that will inform us on the exact size of the project and the investment.

Thank you.

We'll go next to Neil Mehta with Goldman Sachs.

Hi Jim, hi Maria.

Morning.

Hi, Neil.

So on demand, its coming a little softer on a weather normal basis than was guided to this year. What do you attribute the delta to especially in light of some of the good things we're seeing in the local economy, including the D1X project?

You know the softness in the third quarter was really in the residential sector and that could have been due to the combination of weather and maybe additional conservation measures that customers might have been putting in place. We saw some rebound in September, so we generally feel like that may just be a short blip in the curve.

We are seeing some very good activity in the commercial markets, obviously with Intel's D1X project and the supporting people that will bring in facilities to support that project. That's going to add a significant number of jobs.

The also - other companies, Solar will continue to look at expansions and we have another solar company looking in the Portland area to construct facilities. So generally we see some positive signs. Boeing is doing well, that's one of our large customers here and they're doing well also.

So there's some really good signs in some the commercial industrial sectors and so I think with the softness in the residential market might have been a combination of just the conservation measures people were putting in place during the summer, and we didn't have really very warm weather also so that could have been some of the impact.

And the long term annual load growth forecast I think is 1.7%, right, including energy efficiency. Does this make you think about that guidance in any way?

No, not really. I think we feel like I mean over the long term those numbers look right. A lot of it will depend on how quickly Intel and some of those customers come online and expand their facility. So there might be some timing issues as they continue to get that facility constructed and into service. So there may be some - some movement around that number but a lot of it will be just timing issues a little bit in terms of what Intel's doing.

Got it. And then on the O&M side, what are the levers that you have over the next couple of years as we get through at least some period of time without a rate case to manage the return?

Well, two things and then I'll have Maria get in maybe detail on some of the other corporate costs. But we are going through a pretty significant efficiency effort within the company to streamline our operations by using technology, and so we're doing a number of projects in the company that will improve our performance and get better service at lower costs. And those projects are starting to come online next year and will continue for the next couple years. That will hopefully help moderate our costs.

We have a number of retirements because we have an aging workforce with about a third of our employees potentially retiring in the next seven to eight years that we can take advantage of those retirements by using technology and up-skilling our employees and taking advantage of that. So those are some of the things we're doing on the operations side.

The other thing is we're looking on the generation side for continued efficiency improvements at the plants through generation excellence and reliability center maintenance to really improve our plant performance.

So you want to talk on the corporate side?

Sure. I think Neil, we really have cost reductions in every area of the company and there's a very disciplined effort to be able to capture these on a sustainable basis.

As Jim mentioned, we're leveraging new technology, we have new systems being put in place, having just implemented corporate side new supply chain financial and other related systems that are already reaping some benefits.

Terrific. And then finally, rate case timing, how are you thinking about it? I know some of the moving pieces with the RFPs have to change the way you're thinking about the timing.

Sure, I think a lot of it starts with our longer term forecasts and we do take a look at the timing of capital expenditures and large projects and when they will come in line. In addition, we're very fortunate to be in a service territory where there is quite a bit of growth coming online, led by Intel, but really across many of our industrial sectors. And that, combined with really prudent and careful cost reductions, leads us to have some flexibility around our rate cases. And so we're currently looking at a rate case in about 2014. That would be the effective test year, which is pretty consistent with what we talked about on the call last time.

Thank you so much Jim and Maria.

Thank Neil.

Thank you.

We'll go next to James Bellessa with D.A. Davidson.

Good morning.

Morning, Jim.

The energy efficiency question was answered so I have two other questions. The pattern of depreciation and amortization last year and this year that when their first and second quarters is at one level and then it jumps up in the third quarter. Is there something seasonal that happens in the third quarter?

Sure, what happens in particular is that the amortization of Boardman came online and so that jumped it up. We also had some slight adjustments in other miscellaneous areas in the third quarter. But you should see roughly the run rate be pretty consistent going forward with where we are right now as Boardman will be there through the balance of its life.

And the tax rate, do you have any advice on what tax rate we should be looking at going forward?

Sure, as you probably have figured out, our tax rate has - year to date is about 26% and for the quarter was about 29%. The biggest issue affecting our tax rate is really production tax credits and those that we're receiving as the wind blows at our Biglow Canyon wind farm. But on average we've been on an annual basis just under about 30% and that's sort of what I would use for your model.

Thank you very much.

Thanks, Jim.

(Operator instructions). We'll go next to Mark Barnett with Morningstar.

Hey, good morning everyone.

Good morning, Mark.

A lot of questions already answered, so just a couple of smaller issues. On the industrial customer account, I know you've had a lot of positive developments there, but is the lower number on the industrial count due mostly to switching to direct access?

No, at this point in tine that's not the case, there were not any - in the quarter, there were not any movement in direct access. What we saw was just slight changes there for about 180 to 158 and that - on a year to date basis, we're at about 489 and so those are customers who were moving - if you can see direct access and then total industrial is 931 for the quarter.

So there's some movement but not a big deal overall.

Okay. And then I guess so far year to date, hydro has been fairly strong. I'm wondering if that if those conditions have continue thus far into the third quarter or if there is kind of a change?

Well, it's starting to rain again and we don't know if this is a trend. We tend to look at the weather patterns and again this looks like a La Nina year coming up which tends to increase - suggests it will be wetter in the northwest, but those are just current projections and not ready to take them to the bank yet.

Okay, all right. Appreciate the color. Thank you.

Thanks.

(Operator instructions). It looks like we have no further questions.

We appreciate your interest in Portland General Electric and look forward to seeing some of you next week at EEI and invite you to join us when we report on fourth quarter 2011 results in February 2012. Thanks again.

That does conclude today's conference, we thank you for your participation.