Portland General Electric Co (POR) 2013 Q3 法說會逐字稿

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.

Thank you, Noah, and good morning to everyone and we're very pleased that you are able to join us today. 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 for those of you accessing the call over the phone the slides are available on our website at investors.portlandgeneral.com and it is under the events and presentation tab.

Referring to slide 2 I'd like to make our customary statements regarding Portland General Electric's written and oral disclosures and commentary that there will be statements on 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. And for a description of some of the factors that may occur that could cause such differences, the Company requests that you read our most recent Form 10-K and Form 10-Q.

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 this Safe Harbor Statement should be incorporated as any part of any transcript for 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 provide 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. Now it is my pleasure to turn the call over to Jim Piro.

Thanks, Bill. Good morning and thank you for joining us. Welcome to Portland General Electric's third quarter 2013 earnings call.

I would 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've made on the 2014 general rate case, give you an update on our operations, and discuss the economy in our service area. Then Jim Lobdell will give 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 plant 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 the Wartsila reciprocating engines will be delivered to the 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 have 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 be 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 a summary of the Company's five-year capital expenditure forecast. Altogether, the new generation projects along with our ongoing investment in our base business resulted in 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 for reliable service and efficiently generated power.

Moving to slide 10, we filed a general rate case this past February based on a 2014 test year. With the recent stipulation on pension expense I'm 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've also joined other utilities to address long-term pension cost recovery and the power cost adjustment mechanism, or PCAM, in formal regulatory proceedings and we will update you on our progress as 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 July 1. Boardman, which we operate, came back online at the end of July as planned and has been operating at high 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. Repairs are well underway and we expect Coyote Springs to come back online later this month. PGE's share of repair costs for the coal plants' 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. All together incremental replacement power cost in 2013 for these outages are expected to be between $16 million and $18 million. All three of these plants have 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 I and Phase II of its D1X Fab plant 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 data centers and companies like Daimler and Intel continue to expand and grow.

Now I would like to turn call over to Jim Lobdell who will discuss our financial results for the third quarter and review our expectations for the remainder of year. Jim?

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 pretax items. An $8 million increase in purchased 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 planned 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've 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.

Purchased 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 costs 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. It was $4 million higher than the third quarter of 2012. While generation maintenance expense decreased quarter over quarter, delivery system expense increased due to the timing of the planned 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 was 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. In 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. $105 million at 4.74% in November maturing in 2042 and $50 million at 4.84% in December, maturing in 2048. We do not anticipate any further debt issuances this year.

As we look ahead to 2014 we will 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 costs 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, energy deliveries compared to weather-adjusted 2012 levels, O&M expense between $440 million and $460 million, D&A expense between $240 million and $250 million, and capital expenditures between $710 million and $730 million. In regards to our 2014 forecast we will provide earnings guidance on our February call.

Now back to you, Jim.

Thanks. While the generating plant outages have been challenging this year, I'm 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've 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 Instructions)

We'll take our first question from Neil Mehta with Goldman Sachs.

Good morning, Neil.

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

We are looking at probably towards the end of January as the timing the plant would come back online, and it is roughly around $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.

All right. And then, just in terms of the outages, as you have done your own internal review, how have you thought about this being a structural, operational issue versus just a coincidence, unfortunate coincidence, that we've had three outages this year?

You know it's really just an -- I think it is just a coincidence. If you look at the history of these plants, they have 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've repaired that and made the correction. The plant is running well again. The Coyote Springs plant, if you look at historically, that plant was built in -- I think in 1994 or so. It has had a great record of running and the rotors had no problems, so this crack is very unusual to happen. But we've got the repairs and we don't expect a problem going forward. Plant has been a really solid performer.

And then 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, you look at the history of those plants; they've all had a long track record of high availability.

All right.

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

Perfect.

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

So, here's our current thinking for our regulatory strategy. Right now -- and we just had our Board meeting this week -- we talked to our Board about this, and I think they are comfortable with our strategy; which is, file a general rate case in February of 2014. That would include both our 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. And we're 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 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 strings will go into service in late 2014. We'll use a renewable adjustment clause to track in or defer the cost during 2014 for those strings that get completed. And then again we would put the plant into service and the customer prices when it goes fully operational, probably late first quarter 2015.

As for Carty, that current schedule is they had that plant come on in mid-2016. Again we would have to file a general rate case to include that in customer prices. We haven't decided exactly how we will do that, whether we'll run a full general for 2016 or split your test year. We'll just have to look at what fits that project the best. The price increase there is somewhere between 6% and 7%. Again, it would be dependent on gas prices and what's going on in the market at the time, but that's kind of roughly what we are thinking about.

Thanks, Neil.

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

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

Port Westward Unit 2, will -- it's either -- it's 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 look like we will get that thing done in -- maybe even in 2014, but likely early 2015. January.

So would that -- would you have to 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?

The plan right now is to basically put the cost into customers' prices when the project becomes operational. We would have to certify to the Commission that the plant is operational and then we'd make a price change. The same thing with Tucannon River Wind Farm. When it is fully operational we would put it into customer prices at that point, using the RAC 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'd rather not create a deferral that we have to recover in a subsequent period. Better just to put it right into customers' prices.

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

Jim do you want to talk about that?

Yes, between the equity forward that we've got and some additional First Mortgage Bond financing we should be able to cover everything that we need to do in 2014.

What about beyond 2014?

Beyond 2014 really depends on what the capital needs of the Company is. Whether if we've got additional capital projects that we need, it will cover the three generating projects and then base CapEx.

Got it. Got it. Okay, thank you very much.

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

Good morning.

Good morning, Lauren.

Good morning Lauren.

So you mentioned weather-adjusted sales being flat year to date. What were weather-adjusted sales if you also adjust for the leap year? Did you see a bigger uptick when you adjust for that impact?

It is just about the same. There's 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 quarter also.

Okay.

So there's not a lot there.

Okay. And in the third quarter, did you see some improvement in sales that helps give you confidence in your 2014 outlook?

We did see a slight increase in the sales in the residential and commercial. What we're 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 it is just being overshadowed by the fact that we've 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, that's becoming a smaller and smaller percentage, and so further reductions in that sector isn't going to be as impactful.

A couple of other things, Lauren.

We didn't really talk about, in the general rate case they did extend the decoupling mechanism for residential and small commercial, including the lost revenue effect. And as you know we do a fair amount of energy efficiency in our service territory, sometimes as much as 30 average megawatts. So that does -- that reduces our load growth and masks that there is actually growth going on, which is being overtaken or offset by energy efficiency by customers.

We are actually running a pretty aggressive LED street lighting program right now, which is a real great cost-effective program for our customers, but reduces energy usage but also provides us an investment opportunity as we put those lights into service. So there's a lot of things going on and it is hard to show that all in the numbers, and so that's just something to take into account as you look at our numbers.

Thank you very much, guys.

Thanks, Lauren.

Thanks.

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

Hello, good morning.

Good morning, Sarah.

Hello, Sarah.

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 2014 versus 2015?

Yes, we think that we're going to pull down the balance of it in 2014.

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

Correct, yes.

Okay. And then as a follow-up to Neil's question on Colstrip -- I just want to make sure that the $2 million of incremental monthly power cost that you expect to see, that should be embedded in the 2014 power cost forecast, so no impact on EPS in 2014 from the outage, correct?

No. Actually to the extent that Colstrip 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're very focused on bringing or helping PPL Montana bring that plant on time and back online with as little time as possible out.

Got it. Thanks a lot.

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

Good morning.

My first question is on Carty. Your press release says that construction starts early next year, yet 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?

Yes. You have to start construction of the turbine and the generator and things with Mitsubishi. And so there's 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 cost to do all the engineering and procure the equipment. So, some of the prepayments that have to be made before the equipment finally shows up on site.

Okay. That makes sense.

Then my other question is, with the 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?

So as I mentioned, for 2015 -- 2014 is already covered in our rate case, and so we just finished our budget for 2014 and it is totally aligned with what the rate case projections are. So costs are fully aligned for 2014. We look at 2015, we'll 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 2014 and 2015 -- basically just inflation.

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

Yes. That is correct.

Okay. Thank you.

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

I'm actually all set, thank you very much.

Thank you.

Thanks.

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

Good morning. May I just (multiple speakers) -- could you just help us out -- what would be the average share count in 2014?

We haven't provided that before.

Yes, we haven't provided that before. It really is depending on the equity draws and the actual timing of that, the number of shares that we issued in the forward structure are --

Was about 12.7 million with the greenshoe.

Right. So we've got 12.7 million shares we got to issue; prior to that we had about 75 million shares of stock; and as Jim said we will draw that during the first half of year, but we haven't given an exact timing of that draw, but you've --

Okay.

-- seen those shares -- those shares would all be added by the end of the second half of the year.

So is -- do you draw -- should we think of a draw throughout the first 6 months? Or should we expect it all at one time? How should one think of it?

I would say it would be over the first 6 months of the year.

That's the beauty of the forward structure -- we can draw as we need it to fund the cash flows of the construction, so we are not going to overdraw. And we will try to match it with the needs of the construction, which will then be covered through the AFDC calculation.

Yes, I mean, to the extent that milestones associated with the projects move forward or move back we'll just time it appropriately with those.

Okay. Thank you so much.

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

Thank you. We appreciate your interest in Portland General Electric and look forward to seeing 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.

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