Portland General Electric Co (POR) 2018 Q1 法說會逐字稿

Good morning, everyone, and welcome to Portland General Electric Company's First Quarter 2018 Earnings Results Conference Call. Today is Friday, April 27, 2018. This call is being recorded. (Operator Instructions)

For opening remarks, I will turn the conference over to Portland General Electric's Director of Investor Relations and treasury, Chris Liddle. Please go ahead, sir.

Thank you, Sabrina. Good morning, everyone, and I'm pleased that you're able to join us today. Before we begin our discussion this morning, I'd like to remind you that we have prepared a presentation to supplement our discussion, which we'll be referencing throughout the call. The slides are available on our website at investors.portlandgeneral.com.

Referring to Slide 2. I'd like to make our customary statements regarding Portland General Electric's written and oral disclosures. 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-Q. Portland General Electric's first quarter earnings were released via our earnings press release and the Form 10-Q before the market opened today, both of which are available at our website.

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 part of any transcript of this call.

Leading our discussion today are Maria Pope, President and CEO; and Jim Lobdell, Senior Vice President of Finance, CFO and Treasurer. Following their prepared remarks, we will open the lines for your questions.

Now it's my pleasure to turn the call over to Maria Pope.

Thanks, Chris. Good morning, everyone, and thank you for joining us. Welcome to Portland General Electric's first quarter earnings call. On today's call, I will provide an update on our financial and operating performance, the economy in our service area, status for renewable request for proposal. I will then turn the call over to Jim, who'll provide more details on our financial performance and guidance.

Now turning to Slide 4. We reported net income of $64 million or $0.72 per diluted share compared with net income of $73 million or $0.82 per diluted share in the first quarter of 2017. Winter weather was significantly warmer than the prior year, which drove a quarter-over-quarter decrease in energy deliveries. This was partially offset by a decrease in distribution expense as a result of less storm-driven system restoration and repair work.

We are reaffirming our 2018 full year earnings guidance of $2.10 to $2.25 per diluted share. On Wednesday, PGE's Board of Directors approved our 12th consecutive annual dividend increase since we went public in 2006. The 6.6% increase reflects our commitment to providing competitive returns for investors, strong business fundamentals and long-term growth as we increase our mix of clean energy and invest in a more resilient and secured grid.

Now onto Slide 5 for operational and economic highlights. This month, as part of our ongoing commitment to providing customers with 100% clean energy, we filed an application with the Oregon Public Utility Commission, or OPUC, seeking approval for new renewable power options from large business and municipal customers. This program supports cost-effective local and regional renewable power development by enabling customers to welcome with PGE to purchase directly from new solar, wind or renewable energy facilities. In addition, in February, we received OPUC approval for our transportation and electrification plan. Under this plan, PGE and TriMet, our local mass transit authority, on installing and managing new charging stations that will enable Oregon's first all-electric bus route. PGE is also expanding EV charging station infrastructure across our service area.

I am pleased to share that PGE continues to be ranked in the top quartile for customer satisfaction for residential, business and key customers according to Market Strategies International and TQS Research. Additionally, we were again recognized as an environmental champion for 2018 according to MSI.

Turning to the economic health of our service area. Unemployment remains stable at 3.6% with initial claim levels unseen since the late '80s and early '90s. Population growth is 1.8%, largely fueled by immigration. As such, we are seeing an increase in building permits up 12.3% compared to 4.5% nationally. Oregon also saw the largest percent increase for multifamily units permit in the 2017. And at 32 construction claims, Portland has the most permit claims per capita of reported U.S. metropolitan areas.

These strong economic indicators are driving total customer count growth of approximately 1.4% and gives us confidence in our long-term low growth forecast of 1%. However, as we discussed on our last quarterly earnings call, we expect 2018 weather-adjusted energy deliveries to decline up to 1% in large part due to the closure of a large paper company in late 2017 and the impact of energy efficiency.

Turning to Slide 6. I'd like to provide an update on our renewable request for proposal. Following the acknowledgment of the 100 average megawatt renewable needs identified in our 2016 Integrated Resource Plan, we expect to issue a final RFP in early May. The proposal is due by June. A shortlist of proposals should be finalized in October with a notice to proceed by the end of the year.

And now I'm pleased to turn the call over to Jim.

Thank you, Maria. Moving to Slide 7. As we shared on our fourth quarter call, we filed our 2019 General Rate Case with the OPUC in February of this year. We are currently in the discovery phase of the general rate case process with staff and interveners opening testimonies due on June 6, followed by a settlement conference scheduled for June 18. Regulatory review of the 2019 GRC will continue throughout 2018 with the commission expected to issue a final order by the end of 2018. In regards to tax reform, we are currently deferring the net benefits of the lower federal tax rate, which we expect to refund to customers over future periods.

Turning to Slide 8, which shows our earnings driver for the quarter. First, gross margin decreased earnings by $0.18 due to the following: a $0.15 decrease due to an exceptionally cold winter in 2017, and a $0.03 decrease due to unfavorable weather in 2018. While January was warmer than normal, cooler than normal temperatures in February and March helped to offset some of the unfavorable weather in January. Second, a $0.05 favorable increase related to distribution cost as no major storms occurred in the first quarter of 2018. The next driver is a $0.04 decrease due to lower generation maintenance cost and finally, a $0.01 decrease in other miscellaneous items.

On to Slide 9. We provide a summary of the company's current capital expenditure forecast from 2018 to 2022, which includes additional investments in 2018 as compared to our previous forecast. These expenditures are related to investments we are making to support the continued customer growth and build a more efficient, reliable and secure system. For example, we're replacing and upgrading substations and other distribution and transmission equipment. As we identify opportunities for additional investments, we will incorporate them into our capital forecast when appropriate. As stated in our previous calls, we have not included any capital expenditures, and our forecast related to the potential projects pursuant to our renewable RFP or energy storage proposal, which based upon cost projections and regulatory process, we now expect energy storage expenditures would be approximately $50 million.

On to Slide 10. We continue to maintain a solid balance sheet, including strong liquidity and investment-grade credit ratings. As of March 31, 2018, we have cash and short-term credit and available letter of credit capacity totaling $719 million, first mortgage bond issuance capacity of $1.1 billion and a common equity ratio of 49.7%. In 2018, we expect to fund estimated capital requirements with cash from operations, the issuance of debt securities of up to $150 million and commercial paper as needed.

As shown on Slide 11, we are reaffirming our full year 2018 earnings guidance of $2.10 to $2.25 per diluted share based on the following assumptions: the decline in retail deliveries between 0 and 1%, weather-adjusted; normal hydro conditions for the remainder of the year based on current hydro forecast; wind generation for the remainder of the year based on 5 years of historical levels or forecast studies when historical data is not available; normal thermal plant operations for the remainder of the year; depreciation and amortization expense between $365 million and $385 million; and operating and maintenance expense between $575 million and $595 million. Our 2018 guidance assumes that the OPUC approval of the deferral application to capture the revenue requirement associated with our customer information system replacement project, which is expected to be placed in service during the second quarter of 2018. Please note that the equity return portion of an approved deferral would not be recognized on the income statement until we begin amortizing.

Back to you, Maria.

Thanks, Jim. In closing, Oregonians and PGE are at the forefront of a transformation to a clean energy future. We remain committed to delivering safe, reliable, affordable, clean and secure energy.

And now operator, we're ready for questions.

(Operator Instructions) And our first question will come from the line of Christopher Turnure with JPMorgan.

I wanted to get a little more color on your thinking and the board's thinking behind the 6.6% dividend raise this week. It's towards the higher end of the past couple of years of raises that you guys have done. On our estimate, at least for this year, brings you kind of squarely in the upper half of your payout target range, but I wanted to kind of understand your thinking amid a longer-term kind of context here on that.

Sure. Thank you. So the board declared earlier this week, 6.6% increase in our dividend. It really reflects the strong fundamentals of our business. First and foremost, a growing service territory; and as I mentioned in my earlier remarks, strong growth not only in terms of migration into the state, customer load count, but also weather-adjusted load long-term looks very strong. Behind that is our investments particularly in grid infrastructure as well as in clean energy and a concern and focus on making sure that we are delivering value for all stakeholders and shareholders, in particular.

Okay. And implicit in that is -- or I should say, is there implicit in that any desire to not preserve capital for future needs a year or 2 down the road?

And Jim can get into that further, but we feel confident in our capital availability at this point in time.

Okay, despite the 6.6% increase. Okay. And then my second question is on the CIS deferral. I heard your comments, Jim, but I wanted to make sure I understood them. You're saying that you guys will be able to defer basically the depreciation on that, the asset placed into service beginning in the second quarter of this year. But no return would be deferred? And then also if you could just give us an update on maybe your conversations with interveners, so far, on that request.

Well, we're going to request for the costs associated with the development of the CIS system. When it goes live in the second quarter, we will file a deferral to capture the depreciation and amortization associated with that, and then we will have the conversation at that particular point in time with the interveners regarding the recovery of it.

Okay. So it's basically too early to tell if we have a window into whether or not that would get approved?

Yes, yes.

And the next question comes from the line of Michael Lapides with Goldman Sachs.

Really 1 or 2, the increase in CapEx for this year. You've already filed the rate case. How do you get that CapEx into the rate case process? I mean, is that just a known and measurable filing? Or does that incremental $100 million just hold over until the next time you file?

Michael, those dollars are not factored into our general rate case filing for 2019, so it will be part of the decision-making as to what we would do on the follow-on filing.

Got it. So there's no way to file an adjusted number during a known and measurables process?

No.

Okay. In your...

Not unless they want to restart the process, and that's not something we're interested in.

Got it. Totally understand. I want to make sure I understand and this a little bit of housekeeping item. In your guidance, what do you assume is your kind of your tax rate for income statement purposes?

The effective tax rate that we're assuming is somewhere between 11% to 15%.

Okay. And that's for kind of the -- for the GAAP income statement? I'm trying to separate kind of income statement and cash flow -- what you actually wind up paying in cash taxes.

We're expecting to pay minimal cash taxes because of the fact that we've got the PTCs.

Okay. And then finally, on a storage. I want to check in, you've made some comments about the transportation electrification. And I know you've also been kind of contemplating, and there's been a docket around energy storage. Can you talk a little bit about kind of when you think capital could be invested in either of those and any ballpark around kind of what the impact on the capital budget of either of those 2 items could be?

Sure. With regards to the electrification transportation projects that we have going on, it is not a lot of capital, Michael, but we'll move us forward quite significantly in our partnership with TriMet, the regional transit authority here. And I would expect that we will see further capital expenditures in the next couple of years after this initial plan, which is largely sort of a smaller program. In terms of battery storage, we had -- previously had slightly higher indications of capital. We've got up to $50 million at this point in time. There's no significant change here but rather we're going through the normal regulatory processes and honing sort of where we are. Certainly, on the battery storage, in particular, we would like to be moving faster than the docketed process that we have and more aggressively. But again, this is the normal course sort of regulatory environment that we have.

Yes. I mean, there's a whole sort -- a whole bunch of pilot programs that are involved in the battery storage. It's looking at putting batteries next to solar facilities. It's putting batteries in substations or next to capacity units. It's looking at microgrids and then looking at residential applications as well. So there's a lot of work that still needs to be done.

Got it. Last item and just trying to think through to the renewable RFP. If you win that project and on a nameplate capacity, it's kind of roughly 300 megawatts or so, how do you think about how you finance that?

So at this point in time, we are thinking that we can finance this with available cash from operations, additional debt as we move forward.

It really just depends on the size of the project. And as we all know, we still got a lot process to go through to figure out exactly what it's going to look like in the end. We think it's going to be a very competitive process, so we're looking forward to that.

Yes.

And the next question will come from the line of Julien Dumoulin-Smith.

I wanted to follow up on a couple of items. First, with respect to the higher CapEx, can you elaborate a little bit on the timing of the update? I suppose typically we see the update with third quarter every year around these substations. Is it a new policy? Or should we still expect to see yet the latest sort of full plan delineated by third quarter?

Usually, Julien, you'll see it in the third quarter. But as things -- we become aware of things or they become to be more solid in our planning, then we'll include them in the updates. But typically, it would be the third quarter.

Got it. And can I read between the lines? I mean, is this like a customer growth piece of the equation that's driving the acceleration?

So this would be investments in our operations for reliability, resiliency. And certainly, we're seeing a lot of customer growth in our area.

Got it. All right, excellent. And then just a -- turning to the latest on the Oregon Commission here. Is there any potential delays from the latest changes in composition, given it's just the 2 remaining there? Or does that not really have any kind of meaningful impact operationally day-to-day in terms of the commission's ability to move forward? Or what does the tie even mean in terms of any of your pending dockets?

I don't believe that there will be a -- no, it's a great question, Julien. I don't believe there will be any delay there. The governor is contemplating names that she will put forth to the legislature probably by the end of today or early next week to fill the vacant spot. Commissioner Decker has already been named Chair of the commission to replace Commissioner Hardie, who has announced her desire to resign this spring.

Got it. All right, excellent. Good to hear. And then lastly, just to reconcile the renewables procurement. Is there a potential that it's multiple projects? Or is this really going to be fixated on just a single project here as you think about the, call it, nameplate 300 megawatts?

We really don't know. Clearly, the economies of scale would favor a larger project but we could also see multiple projects being bid in that would be very competitive. As Jim mentioned, it will be a competitive process.

Right, absolutely. And it's not known necessarily if you're necessarily partnering with anyone specifically, or it's not necessarily necessary yet either, right? You don't necessarily need to identify any build on transfer opportunities until after perhaps the initial, I suppose, proposals come out.

Well, the only thing that we have put out there publicly, Julien, is the fact that we've got a benchmark project that we are proposing to put into the RFP process. We find that when we do that, the process becomes very, very competitive, and we get great prices for our customers' investment opportunities.

And the next question comes from the line of Paul Ridzon with KeyBanc.

How much of a drag is the loss of the paper? How much of that 1% is driven by that?

Loss of the paper?

This is the paper company.

Loss of the -- you mean a drag in earnings, a drag in load.

Load growth, load growth.

We haven't shared that. That would be giving out customer information.

But it's not insignificant, so it was a significant change year-over-year.

Yes.

And then what was the wind capacity factor for the quarter?

I think it was about 31%, 32%.

It was up quite a bit for the quarter primarily because last year's first quarter was significantly below normal at about 19%.

And what's the 15 you were talking about?

Oh, what's normal? We're still trying to figure that one out. I'm sorry. You flipped it but if we haven't seen what we thought would be normal for the last several years. So we're starting to see things start to coalesce, but I think we've got a little bit more of a track record to go.

And then what's the structural regulatory lag in basis points we should be thinking about?

It's about -- well, on a dollar amount or on a percentage of basis points? I mean, on our dollar amount -- go ahead, Paul.

Basis point would be actually more helpful.

Yes. I'd say it's more around 70 basis points.

And any kind of actions you could do to kind of work that down? Or is that kind of probably stuck there for a while?

We're continuing to look at to see if there are ways to get a better cost recovery of the items that are included in it. So that's an ongoing project, an ongoing conversation that we have with the commission. Actually, I would make it -- I'm going to correct my statement on basis points. It's more around 80 basis points, 80 to 85 basis points right now. It represents about $29 million, excluding Carty. And keep in mind, that's pretax.

And the next question will come from the line of [Agustina Goloza] with Mizuho.

I just wanted to get a sense of the weather-adjusted decline in retail and deliveries for the quarter, especially since you're reiterating guidance with up to 1% decline in retail and deliveries for the year?

Actually, for loads on a weather-adjusted basis for the quarter, they're actually up 0.5%. And if you look -- and Maria had mentioned this earlier, when you look back behind, residential is up about 1.2% on a weather-adjusted basis, driven by about 1.4% in customer count increase. That was partially offset by energy efficiency out there. Commercial was down about 1.4%, weather-adjusted, and we just got a weakness in a few sectors. And then industrial was up about 2.4%, and that was more or less fueled by the high-tech sector, which would be more on the semiconductor side.

Perfect. And then can you give us an update on the Carty litigation? I don't know if there is any update on the time frame?

No, not at this particular point in time. We had an arbitration in front of a panel early this month, and it was to figure out are the claims arbitrable in front of the International Commerce Commission and who the parties would be. We won't know the outcome of that for a while. And so until we hear something from that panel, I think we're just kind of on hold.

Okay, perfect. And just what would you expect the hydro conditions to be throughout the year?

Maria, what is that?

We're looking at about normal.

(Operator Instructions) And our next question will come from the line of Travis Miller with Morningstar.

You answered my dividend question and one of my tax questions, so I'd have to try another one here on the tax side.

Good talking to you, Travis.

Given the PTCs and you mentioned the cash tax position, how long can you go? Again, given the PTCs and you've got obviously a nice DTL to return to customers, how long can you go do you think with essentially no cash tax position?

It's going to be quite a while. I can't tell you the exact number of years out into the future. But I will say is what the production of -- continued production of PTCs, we will use them as generated, and we don't believe that we will see any of them expire.

Our last generation of our production tax credit is in 2024.

Yes.

Okay. And those can cover that, plus the return of whatever cash on the DTLs could cover a substantial amount of the GAAP tax.

Yes, about 75% of your taxable income or your tax can be covered with PTCs.

And the next question will come from the line of Michael Lapides with Goldman Sachs.

Hey, Jim, just housekeeping on the structural lag. That $29 million, that's a pretax number. So using your really low tax rate, you're talking about $25 million -- $24 million, $25 million on an after-tax basis. Has that changed much in the last couple of years?

It's gone up slightly but not a lot.

Michael, one of the most significant things that Jim has done in the rate case is requests a full volumetric decoupling for weather and then also storm restoration recovery. So while that was -- we normally don't think of those as part of structural lag, it's a really important part of our rate case as we move forward and not uncommon for utilities across the company that experience such significant weather patterns as we do in Oregon.

And the next question comes from the line of [Kevin Fallon] with Citadel.

Could you quantify what the weather impact in the first quarter was versus normal?

The weather impact in the first quarter was about $0.03.

Okay. And I thought you guys had said on the fourth quarter call that you had bake in an $0.11 hit into the guidance and it came in much better than that. Is there some other driver that has materialized?

No. We did, we said $0.11. And now you've got about $0.03 that has showed up in the first quarter, and that's -- you've got to keep in mind, weather is just degree days. But we're -- at this particular point in time, we've got out too much of a year ahead of us before we're willing to consider any other look at our guidance.

Okay, that's fair. And it also said in the Q that you guys had an unplanned outage at Boardman. Was that a material event?

No.

No. It's a place in the fourth quarter of 2017 and will continue for a little bit longer, but it's not material at all. In fact, it can be (inaudible) of the results that we have.

And on the storage investment that you guys are making, does that come with rider recovery?

You mean -- what we are asking for as part of that process is the ability to use the renewable adjustment clause to recover the costs associated with those investments.

Okay. And that's about half of the increase. Is there -- is the other $50 million-ish need to be recovered in GRC?

No. Kevin, when we look at the up to $50 million that we're anticipating associated with all of the pilot projects or energy storage, it's to say with all of those dollars, we're anticipating the use of the renewable adjustment clause, which would allow us to be able to track that into customer prices.

Okay. That's very helpful. And last thing, when are you guys expecting the commission to rule on the request to defer the billing system?

We won't see that until, let's see -- we will be filing it this quarter, and there's no statutory time limit associated with it so it's going to be a while.

But as it's pending, you're allowed to effectively run it through the financials as if it's being granted.

Yes.

Thank you. I'm showing no further questions at this time. I would now like to turn the conference back over to Ms. Maria Pope for any closing remarks.

Thank you. We appreciate your interest in Portland General Electric, and we invite you to join us when we report our second quarter 2018 results in late July. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes your program. You may all disconnect. Everyone, have a great day.