Portland General Electric Co (POR) 2012 Q3 法說會逐字稿

Good morning everyone and welcome to the Portland General Electric Company's third quarter 2012 earnings results conference call. Today is Thursday, November 8, 2012. 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 Brian 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 point out that we have prepared a PowerPoint presentation to supplement our discussion today and we will be referencing slides throughout the call. For those of you accessing the call over the phone you can access those slides on our website at PortlandGeneral.com.

Now referring to slide number two I'd also 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 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-Qs. The Form 10-Q for the third quarter 2012 is available on our website 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 and this Safe Harbor statement should be incorporated as part of any transcript on this call.

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

Refer to slide three. 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 out strategic capital projects. Then Maria will provide more detail around the quarterly results and following our prepared remarks we will then open the lines up for your questions and it's my pleasure to turn the call over to Jim.

Thanks, Bill. Good morning everyone and thank you for joining us. Welcome to Portland General Electric's third quarter 2012 earnings call.

As slide four shows, PGE's third quarter net income was $38 million or $0.50 per share. We are reaffirming our 2012 earnings guidance of $1.85 to $2.00 per share and will provide guidance for 2013 on next quarter's call.

As you can see on slide five, today I'll give you an update on Oregon's economy and discuss operational excellence as well as the progress we're making on our strategic initiatives. Then Maria will provide a financial update detailing PGE's third quarter results, liquidity and our outlook for the remainder of the year.

Now let's move to slide six for the economic outlook in our operating area. Oregon continues to transition from a natural resource, commodity manufacturing economy to one that is more diversified. Our operating area has seen continued growth in high tech most clearly with Intel's D1X fab, the largest in the world which Intel recently announced would double in size. In addition, four data centers and a solar manufacturer have located here in the past two years. We have also seen significant growth in parts manufacturing and the healthcare sector.

The state's unemployment rate continues to decline, dropping to 8.7% in September from 9.5% a year ago. The unemployment rate in our operating area is averaging 7.6% down from 8.3% last year. We have continued to seek customer growth of about 0.5% annually since 2009. Since this time last year we have added 4,500 customers. So far this year our weather adjusted energy deliveries are up about 0.5% over 2011 weather adjusted levels driven primarily by the industrial sector. We expect to maintain that 0.5% growth for the full year.

Now on to slide seven for operational excellence. We continue to deliver excellent operating performance Company-wide. Our generating plant availability continues to be in the top quartile and has exceeded our expectations for the year. Our distribution reliability metrics which measure the frequency and duration of customer outages are strong. This performance is a key component that influences our customer satisfaction. We are the number one industrial owned utility in the nation for residential customer satisfaction and in the top decile for business customer satisfaction in JD Powers and Associates 2012 electric utility satisfaction studies. We are also ranked second nationally for key customer satisfaction by TQS Research, Incorporated.

In addition, we are making good progress on our continuous improvement projects aiming at transforming our operations to be more efficient and effective. I am proud of our employees' hard work and dedication to customer service, outstanding system reliability and cost efficiency and effectiveness efforts.

Now please refer to slide eight for an update on our progress executing our IRP action plan. For our capacity and energy RFP, PGE received 32 bids representing 15 projects. These include a mix of projects to be sold to PGE, projects that would sell power to us under long term purchase agreements, and PGE's benchmark bids. We are working with an independent evaluator selected by the Oregon Public Utility Commission to evaluate the bids. We expect to have a final shortlist of projects by the end of 2012 with final resource selection taking place in the first or second quarter of 2013.

Moving to slide nine we are also making progress with our renewable RFP. We issued the RFP and submitted a benchmark proposal in October and all other bids are due next week. We expect to have a final shortlist by the end of the first quarter of 2013 with final resource selection occurring within the first half of next year.

Now turn to slide ten for a Cascade Crossing transmission project update. We continue developing and providing information for the draft federal environmental impact statement and the environment analysis for The Confederated Tribes of the Warm Springs. We are also in the midst of negotiations with Bonneville Power on agreements that will enable the integration and operation of the project into the Northwest power grid with PacifiCorp regarding their potential participation in the project as a co-owner and with The Confederated Tribes of the Warm Springs on easements to cross tribal land.

The project is in the planning and permitting stage and we expect to receive the necessary permits in 2014. Subject to receiving all necessary approvals we are targeting an in-service date no earlier than 2017.

Overall, we are making positive progress on the RFPs and Cascade Crossing that will deliver long term value to our customers as well as contributing to potential growth for the Company.

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.

Thank you Jim. Turning to slide 11, net income for the third quarter of 2012 was $38 million or $0.50 per share compared with $27 million or $0.36 per share for the third quarter of 2011.

For the first nine months of the year our net income was $113 million or $1.49 per share versus last year when we earned $118 million or $1.57 per share. Quarter over quarter, the increase in net income was driven by three main factors -- a 2% increase in residential energy deliveries due to warmer weather, an adjustment to the PCAM, or Power Cost Adjustment Mechanism, a small investment gain on our non-qualified benefit plan trust assets compared with an investment loss in the third quarter of last year. Year to date earnings are lower than last year due to a decrease in residential energy deliveries and less favorable hydro conditions.

On slide 12, total retail revenues for the quarter were $422 million, up $16 million from the third quarter of last year. Revenues related to the PCAM increased quarter over quarter as we recorded a $4 million customer refund in the third quarter of 2011 and a $7 million decrease to the 2011 customer refund this quarter.

Energy delivery revenues decreased quarter over quarter largely due to a 1% decrease in the average retail price of energy sold and an increase in the number of customers purchasing power from an energy service supplier rather than directly from PGE. In particular, we've seen some customers in the healthcare, grocery, and retail sectors shift to energy service suppliers. However, this is a neutral effect on gross margin as the lost revenue is offset by power cost reductions and fixed generation charges.

Total retail energy deliveries increased approximately 0.5% quarter over quarter including a 2% increase in residential deliveries when energy deliveries are adjusted for weather and for certain industrial customers that minimally impact margin. Loads are down in the third quarter about 4% versus last year. This is driven by a decrease in commercial deliveries particularly in the government and education sectors. Because of this decline we've reduced our full year weather adjusted load forecast from 1% to 0.5%. This is in line with the 0.5% growth we've seen to the end of third quarter this year.

As you can see on slide 13, purchased power and fuel expense was flat quarter over quarter at $182 million. The average variable power cost increased by 1% while total system load decreased by about the same amount.

Decreases in hydro and wind generation drove the overall variable power cost increase. Generation from PGE owned and Mid-Columbia hydro projects exceeded our annual power cost update tariff forecast by about 14%. However, this is lower than last year's particularly favorable hydro conditions. Generation at our Biglow Canyon Wind Farm decreased quarter over quarter due to less favorable wind conditions.

Lower than expected wind generation also reduced our production tax credits which resulted in an increased effective tax rate for the quarter. For the full year we expect our effective tax rate to be comparable to rates over the past few years which have ranged from 28% to 30%.

Net variable power costs were $4 million below the baseline for the third quarter for a total of $14 million below the baseline for the first nine months of 2012. We estimate the power costs will be within the lower deadband of the PCAM for the full year but we do not expect to record a 2012 refund to customers.

Moving on to slide 14, production, distribution and administrative costs totaled $99 million this quarter, down $6 million from the third quarter of last year. Higher plant maintenance and pension costs were offset by lower distribution, system and administrative expenses.

Depreciation and amortization expense for the quarter was $63 million, up $4 million quarter over quarter. This includes a $3 million decrease related to the deferral of cost associated with several capital projects. So far this year we've deferred $11 million and expect to defer a total of $16 million for the year. Capital expenditures this quarter were $81 million and totaled $218 million for the first nine months of 2012. We expect capital expenditures for the full year to be $328 million.

Please now turn to slide 15. We continue to maintain a solid financial position including investment grade credit ratings and strong liquidity. As of September 30 we had $755 million in cash and available revolver capacity. In October we redeemed $100 million first mortgage bonds bringing our equity to 51%, a little over our target of 50% debt and 50% equity. Our need for additional long term debt or equity will depend on the timing of Cascade Crossing and the outcomes of the RFPs.

As Jim noted, we are on track to be within our full year earnings guidance range of $1.85 to $2.00 per share as shown on slide 16. We have reduced our load forecast but we continue to benefit from favorable power supply operations and remain focused on improving the efficiency and effectiveness of our core utility operations. Jim?

Thank you, Maria. Our performance during the third quarter reflects our continued focus on operational excellence. Moving forward we will continue to execute our business strategy and will position the Company for future investment opportunities that deliver value to our customers and to our shareholders.

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

(Operator Instructions)

And we'll take our first question from Andrew Weisel with Macquarie Capital.

First on the timing of the RFP decisions and Cascade in-service date, it looks like they were all pushed back or potentially pushed back a little bit. Can you just walk us through a little bit about what drove you to those?

Really, it's just the timing to get through the process. We had a little bit of delay when the OPC granted about a ten day extension in getting information from the bidders into the process to clarify certain information around gas supply for the various projects so that has slowed us down a little bit. And then it's just the evaluation process we're going through. Right now we're working on putting the shortlist together. We hope to have a final shortlist by mid-December. At that point then we'll start negotiating with that shortlist of bidders. All that is confidential and we can't share that generally into the marketplace.

Ultimately, we'd like to get a final decision on the capacity and the energy resources either late Q1 or early Q2. It really just depends on the speed of the negotiations as we go through that.

On the renewable RFP I think we're pretty much on schedule. We will get the bids next week and then we'll go through that same process of putting the shortlist together and then start negotiating with that shortlist so you know, it got a little bit slower but not materially slower than what we had initially laid out.

Cascade Crossing, it is a little bit more delayed but we continue to work on the environmental permitting process. It is a complex process. We're putting all the information together. It's just the nature of these projects as we go through them.

Okay then sort of bigger picture, when you think about reducing the forecast for load growth, we talked on the last call a little bit about the longer term trends coming down as well, how do you gauge the risk that the in-service dates for the generation projects or the transmission might get pushed back by say, another year or two?

As it relates to the load forecast?

Right, I understand you have the shortfall in your capacity but all things equal, if the demand is slower than expected, might that affect the in-service dates?

No, not really because we are a short utility. We do not have enough existing generation to meet our retail load and so the resources that we are proposing to add are just to fill in that open position that we currently buy in the marketplace so the timing of loads really does have little impact on the need for those resources. We still need them irrespective of the speed of the load growth.

Okay, very good and then lastly, just if you would clarify a little bit on pension. There was some comments about some year over year impact from the benefit plans. If you could quantify that and then as we approach yearend, maybe early thoughts on what the 2013 pension effect might look like?

Maria, do you want to cover that one?

Sure. We have had an increase in our pension expense from 2011 to 2012 and we have offset the vast majority of that with reductions in other areas and we expect to do that as well in '13. What we have reflected in customer price is about $5.1 million and that was roughly what our pension expense was in '11. In '12 it's $13.6 million and in '13 we're expecting it to go up roughly about another $10 million although we have not finished the estimates for that. Most of that change is due to the lower discount rates.

And we'll take our next question from Neil Mehta with Goldman Sachs.

How are you thinking about the timing of your general rate case here and how do recent ROE outcomes in the state impact your rate case?

We just finished our 2013 budget and we are looking at the 2014 budget. Right now we're planning to file a 2014 rate case. We probably plan to file that in February. We still haven't made a final decision on that but we're going through all the steps to look at the numbers. Obviously, we have to consider what is going on across the country in terms of ROEs. You've seen overall throughout the country a trend downwards but that's something we take into account as we make decisions on filing the case.

We have a couple projects that come online in 2014 that we really need to address. One is the Boardman Dry Sorbent Injection Project that we need to implement to meet our requirements under the new MACT rules and our SIP agreement with the state. That's a pretty important project. We also have a couple of small capital projects that are coming into service so those are all factoring into our decision as well as what Maria talked about in terms of the pension. That is another issue we're going to have to address so we're making plans right now. We haven't made the final decision yet but we're just going through the numbers, kind of stepping through the process. We'd likely file, if we make the decision, in February. In Oregon, it's about a ten month process to get through that overall process so rates would be effective January 2014.

Got it and at this point we've gotten the decision in terms of a peer utility, for their ROE. I think we'll get one more before you ultimately make the decision on whether to pull the trigger?

That's part of the, we'll look across the nation too and see what interest rates are doing. That all goes into our evaluation on when we file a case or not. Maria, do you have anything else to add?

No and I would also note that in addition to Northwest Natural which I think you're offering to, there have been other utilities that have filed in Oregon in terms of Idaho, Avista, and then PacifiCorp is currently working towards a settlement on their current rate case.

And we'll take our next question from Lauren Duke with Deutsche Bank.

It looks like you're expecting ongoing CapEx to be up about $50 million in 2013 and 2014 versus your disclosures from last quarter. Can you just explain what that relates to and if that is also coming into play in your rate case timing decisions?

Sure, our capital expenditures for 2012 are pretty much unchanged. As we look at 2013 they're up a little bit but not significantly and these capital expenditures are not driving any decision with regards to the rate case. When we look at the larger rate case driven capital expenditures, those would be the RFP projects and Cascade Crossing that Jim talked about earlier.

Those probably wouldn't affect us in 2014. The soonest the capacity resource would come online would be 2015 and so that would, again that would go into maybe a 2015 rate case so as far as 2014, they're more of the smaller projects that we've been going as well as the ongoing capital to reinforce the system.

Okay great and then secondly, do you plan to disclose what your renewable benchmark project is and if not, what is the thinking behind that when you disclosed the capacity and energy RFP projects?

At this time we don't have any plans to disclose the name of our renewable benchmark project. PG's acquisition of the project is subject to an agreement with a third party which is covered under a confidentiality agreement so we currently don't have any plans to disclose the name of the project unless we're selected as the winning bidder.

And we'll take our next question from Brian Russo with Ladenburg Thalmann.

The $100 million of first mortgage bonds that were redeemed, essentially that was debt reduction, that wasn't refinanced with other debt, correct?

No, we used our excess cash, exactly.

Okay so when we look into '13 over '12, total debt should be down roughly $100 million?

Yes, we also have some maturities that are taking place in '13 as well and we currently continue to have excess cash although not nearly as high as it was at the end of third quarter at $156 million and a lot of that again will depend on the timing on the capital expenditures.

Okay and just if you can convey what level of confidence you have in earning at the 9% kind of utility benchmark ROE in '13 given the lower revised load forecast.

I think if you look at our load forecast for 2012 the main area is really the commercial sector which tends to move around a bit. As Jim described in his opening comments, we're continuing to see very strong industrial growth which is really where we have forecast the vast majority of our long term growth to come from and in particularly, Intel is expanding and that also has implications to other customers of ours in addition to Intel who are significant suppliers to them. We're also seeing a number of data centers come into the area and have made announcements for future growth as well as are coming on line right now. We've actually even seen a new solar customer enter the market and take their production up quite significantly so we see this as a blip for this year but we don't see it changing our long term trends or our ability to earn our target of about 9% which is, we've talked about before, is about 1% off of where we see our regulated ROE of 10% which is our current rate.

Okay so I guess we might expect growth, load growth to accelerate in '13 over the '12 level of 0.5%?

Sure, that would certainly be our expectation. As we disclosed in prior documents, we estimate over 1% load growth on a pretty continual basis and much of that is coming from the industrial sector.

And we'll take our next question from Sarah Akers with Wells Fargo.

I appreciate the comments on the pension expense. I was wondering if you could comment on the O&M trend or goal for 2013. I thought for 2012 it was to keep it flat. Is that the case again in '13?

Sure, what we've done is we've taken a look at our overall O&M spending and as we've noted, we do have a number of inflationary things happening to us in terms of rising commodity prices, healthcare cost, salary increases and others and we've really worked hard to offset those natural cost inflation factors with cost reduction activities and being more efficient. As we've mentioned in the past, we've benchmarked almost every major area of the Company and have significant plans in place to reduce our costs. We've implemented a number of new systems -- a new financial system, a new supply chain system aimed at reducing our purchasing costs and just this past Monday we went live with new inventory and work management systems. None of these changes in streamlining of our operations is easy and takes a lot of work so it's really a project or series of projects that we're implementing over the long term.

Offsetting that is the pension discussion which is in the numbers that we've already talked about so we continue to focus on this area but I wouldn't place too much emphasis on our numbers in any one quarter and really look to our longer term trend guidance on the last page of the slide deck of $105 million to $110 million.

(Operator Instructions)

And we'll take our next question from Michael Bates with D.A. Davidson.

A couple of questions, do you have any visibility as to why wind assets in the region have been performing below expectations?

We have been doing a lot of work on this topic just because we're learning more about the wind regime in the Columbia Gorge and so we've done new studies and we're trying to evaluate those studies in the context of what we're seeing overall. This is again a fairly new industry. Just like hydro, there is variability and we've seen some down years even though this year is probably one of our higher years but still a little bit below expectations. We continue to work with [Girard Hussan] who is the expert in this area to really understand the wind regime in the Gorge. Again, we're into this maybe five years and learning more and more about the wind regimes and even though the pattern has been down, we're not sure that this is a trend for sure but we're trying to evaluate the best we can and they're helping us study it and learn that the impacts of the various wind farms have on each other as well as just the overall wind regime in the Gorge. This will be probably a topic at our next rate case as we go through it and talk to the Commission about how do we adjust for the uncertainty of wind and deal with the variability that we've seen over the last few years.

Sure and in your Q you disclose that power costs are expected to be about $22 million lower in 2013 versus 2012 if I read it correctly. Does that assume that Biglow assets perform at a level in line with historical expectations or have those expectations been revised downward?

In the annual update tariff we used the capacity factors from the previous rate case and those represent not necessarily the historic average but represent the studies that were performed at the time we decided to move forward with those projects so they do not necessarily reflect any kind of averaging of the historic results we've seen. That's the assumption in there. The only way you can adjust those capacity factors as we see it today is going into a general rate case and changing that mechanism on how they're forecasted for each annual update tariff. The $22 million does not include any of the recent experiences we've seen up at the wind farms.

And Michael, just for perspective, in both 2011 and 2012 we're looking at about $0.03 to $0.04 a share impact.

And we'll take our next question from Mark Barnett with Morningstar.

I know you've already kind of addressed this a little bit with the renewable projects but you had mentioned on last quarter's earnings call that you wouldn't disclose particular names of projects for competing RFP bids but that you might provide some general statistics. I'm wondering if we're going to see that any time soon or if you could give us some detail today.

The process right now is we won't get all the bids in until next week. I think the date is November 13 they're due so we typically, once we get all those in and assess them, as we did with energy and capacity we send out a general report on how many bids we received and generally the number of them and just some general characteristics. We can't disclose the names of the bidders. That's all confidential but we can provide some general characteristics and just some broad information on the bids, how many megawatts, how many bids, how many different kinds of bidders, some of that general information like we did with the energy and I would expect we would do that just because of the interest. My sense is it will be a very competitive bidding process. We seem to be the only one out there acquiring new renewable resources as we look at the other utilities around the region so we expect a lot of interest in that RFP.

Okay and just a minor thing, you talked a little bit about pension expense but when we look at your run rate for overall operating expense for 2012, when we look into 2013 is it a little too early to provide any guidance around that or where might we stand?

Our pension is the area that is going up the most between '12 and '13 and we'll provide better guidance on full O&M expenses on our next call as well as guidance for the year.

(Operator Instructions)

And we'll take our next question from [Ayesha Kahn] with [Vizeum].

My questions have been answered, thank you.

Okay, it looks like we don't have any other calls. We appreciate your interest in Portland General Electric and invite you to join us when we report our fourth quarter 2012 results. We are also looking forward to seeing many of you at EEI next week. Thanks a lot and have a great day.

And ladies and gentlemen, that concludes today's conference call. We thank you for your participation.