Portland General Electric Company (POR) Q4 2019 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to Portland General Electric Company’s Fourth Quarter 2019 Earnings Results Conference Call. Today is Friday, February 14, 2020. 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 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 and Treasury, Chris Liddle. Please go ahead, sir.

Thank you, Jonathan. Good morning, everyone. I’m pleased you’re able to join us today. Before we begin 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 two, I’d like to remind everyone that some of our remarks this morning will constitute forward-looking statements. We caution you that such statements involve inherent risks and uncertainties, and actual results may differ materially from our expectations. For a description of some of the factors that could cause actual results to differ materially, please refer to our earnings press release and our most recent periodic reports on Forms 10-K and 10-Q, which are available on our website.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 line for your questions.Now, it’s my pleasure to turn the call over to Maria.

Thank you, Chris, and good morning, everyone. Welcome to Portland General Electric’s 2019 Earnings Call.Today, I’ll share an overview of our financial results, earnings growth expectations, a regulatory update on our integrated resource plan, and a summary of what we’re seeing in the Oregon legislative session. Jim will provide more detail on our financial results, our outlook on 2020, and then, we will address your questions.Turning to slide four. In 2019, we recorded net income of $214 million or $2.39 per diluted share compared with net income of $212 million, or $2.37 in 2018. We finished the four quarter earning $0.68 per diluted share compared with $0.55 in the fourth quarter of 2018. The increase in earnings per share was driven by improved gross margin due to strong industrial demand and higher earnings from ongoing investments in our system. The higher gross margin was partially offset by higher operating expenses, including vegetation management and wildfire mitigation, which Jim will later discuss.Looking ahead, we’re initiating 2020 full year earnings guidance to $2.50 to $2.65 per diluted share. To provide more clarity on future growth, we’re removing the time period assessing with our long-term earnings guidance. We are now guiding to 4% to 6% earnings growth on average. In some years as we experienced in 2019, our growth may be below this range or as indicated by our 2020 guidance, we may have growth above the range.On slide five, a few significant accomplishments this year include, the ongoing reduction of carbon emissions in our power supply portfolio, with the construction of the Wheatridge renewable energy Boardman coal plant for closure. Both are on track and expected to be completed by the fourth quarter of this year. Additionally, in response to customers’ overwhelming support of renewable energy, we launched our Green Future Impact program. 17 large municipal and corporate customers will receive energy from this facility, the largest solar project to be built in Oregon. This program complements our IRP, plans for additional renewable procurement up to 150 average megawatts. We value the opportunity to partner with Avangrid and expect the facility to be operational in 2021.In 2019, we also continued investments in our system and focused on advancing communication network through our service territory and progressed on our previously announced integrated operations center, laying the groundwork for our smart grid initiatives.And finally, just yesterday, we received approval from the OPUC on our transportation electrification planner, which will enable further investment in electrification throughout our service territory.Turning to slide six. The economic conditions in our service area remained strong. In 2019, Oregon ranked 10th for the rate of in-migration. When it comes to customer deliveries, a 6.7% increase in industrial deliveries was a major driver in 2019, offsetting downward pressure of energy efficiency on our residential and commercial deliveries. For 2020, we anticipate the deliveries to our current high-tech customers will again lead the way in our overall growth.Now, I’d like to briefly touch on legislative matters. The 2020 legislative sessions began this month with renewed focus on regulating greenhouse gas emissions. We’re supportive of legislation that accelerates our customers’ interests to reduce carbon emissions, while not paying twice for the current renewable and clean energy trajectory that we are on. Additionally, we are supporting a few proposals to accelerate infrastructure investments, enabling a clean and modern transportation system.Turning to slide seven. The regulatory process for our integrated resource plan continues to progress and we expect the final decision from the commission in mid March or later. Regarding our renewable action plan, we’re focused on adding renewable resources of up to 150 average megawatts, prior to the end of 2024. This reflects the recent extension of the federal production tax credit. In addition, we’re targeting up to 600 megawatts of dispatchable capacity. We’re currently engaged in bilateral contract negotiations with existing generators in the region to fill a portion of this need. As with past processes, we plan to initiate RFP design and independent evaluator selection discussions with parties with the RFPs to follow.And with that, thank you and I’ll hand it over to Jim.

Thank you, Maria.Turning to slide eight., I’ll start by walking you through the earnings drivers for 2019. First, gross margin increased earnings by $0.26 due to a $0.12 increase associated with additional investments to better serve our customers, $0.11 increase attributable to the net impact of decoupling as we experienced a decline in the average use per customer from our residential and commercial, higher revenues due to the increased industrial demand, a $0.03 net increase attributable to weather, which consisted of a $0.07 increase due to unfavorable weather in 2018 and a $0.04 decrease due to unfavorable weather in 2019. Second, a $0.09 decrease in earnings attributable to higher operating expenses, consisting of a $0.13 decrease, primarily attributable to cost associated with vegetation management and wildlife mitigation efforts, a $0.05 decrease associated with IT and administrative and general expenses, primarily attributable to higher labor and employee benefits and a $0.09 increase due to a change in year-over-year bad debt reserves. In 2018, we had recognized a onetime increase in bad debt reserves as a result of the customer information system implementation, a $0.04 decrease associated with Carter, which consists of the net effect of a $0.10 tailwind from the cash settlement in the third quarter of 2018 which did not reoccur, and a $0.06 benefit from avoided carrying and litigation costs recognized in the first half of 2019, a $0.02 decrease from higher depreciation and amortization expense, resulting from capital additions, a $0.07 decrease associated with lower PTCs as wind underperformed for the year, and a $0.02 decrease from other miscellaneous expenses.As we look ahead, each year we evaluate our cost structure to ensure that we are providing safe and reliable service to our customers and to determine whether or not we will file for additional cost recovery. For a second consecutive year, we have seen opportunities to reduce costs and as a result have decided that we will not be filing a general rate case with the Oregon public utility commission for a 2021 test year. We’ll continue to reevaluate the need to file on an annual basis.Moving to slide nine. As Maria mentioned, we’re providing long-term earnings guidance of 4% to 6%. In addition, we are initiating full year 2020 earnings guidance of $2.50 to $2.65 per diluted share, which assumes the following. An increase in retail deliveries between a 0.5% to 1.5% weather-adjusted. This forecast reflects an increase in non-residential energy deliveries driven primarily by high-tech manufacturing sector as well as increases in residential deliveries from a growth in customer count. Average hydro conditions for the year, wind generation for the year based on five years of historical levels or forecasted studies when historical data is not available, normal thermal plant operations, operating and maintenance costs between $590 million and $610 million. During the year, we’ll begin the process of repurposing operating costs at our Boardman plant to offset inflationary increases elsewhere in the business including costs associated with incremental vegetation management, and wildfire mitigation, which we elevated during the second quarter of last year. This repurposing is in addition to other cost savings, we have been able to achieve in the areas of field productivity, lower generating plant maintenance, IT and financing costs.Next on guidance assumptions, we expect depreciation and amortization expense between $415 million and $435 million. We’re also forecasting for the year an effective tax rate between 15% to 20% and an average CWIP balance of $340 million, which includes Wheatridge and the integrated operating center. Finally, we expect cash from operations of $625 million to $675 million.On to slide 10. As we look forward to 2020, we continue to maintain a solid balance sheet including strong liquidity and investment-grade credit ratings. We expect to fund estimated capital requirements with cash from operations and the issuance of debt securities up to $400 million.And now, operator, we’re ready for questions.

[Operator Instructions] Our first question comes from the Julien Dumoulin from Bank of America. Your question, please?

Good morning, guys. This is actually Ryan Greenwald on for Julien. Thanks for taking our questions.

Good morning, Ryan.

Good morning.

So, just to clarify, did you say that you guys are removing the base here for the 4% to 6% EPS growth?

We are keeping the base here for the 2018 through 2021, but we are signaling that on a foregoing basis we are trying to achieve a 4% to 6% on average.

Got you. Helpful. And then, on cost cuts and how you’re kind of thinking about that, could you just provide a little more color into 2020 here, given the lack of the rate case?

Well, as I mentioned, we’re looking across the organization. We’ve made great strides in the IT department, in the field as far as our effectiveness, our ability to have full schedules associated with our crews. We are repurposing, as I’ve mentioned the Boardman O&M dollars that will be no longer necessary as we move towards decommissioning that plant. That will help us cover some of the other costs associated with inflationary challenges that we’ll have as we move through the year. That’s just a small sample of the things that we’re working across the entire organization to better prove our efficiency.

Got it. And then, lastly, you guys aren’t thinking about any equity issuances, right?

No. An equity issuance would be tied to a major asset purchase or a bill. Otherwise, we don’t see that necessary.

Our next question comes from the line of Brian Russo from Sidoti

Hey, could you just elaborate on your comments on repurposing of Boardman cost? Boardman plant expected to retire at the end of 2020. So, those cost savings would begin in 2021. Are you accelerating those savings into 2020 to manage O&M? Just a little more insight there?

Yes. We’re having a little bit of trouble hearing you, Brian. But, I got your question. On Boardman, Boardman is going towards the end of 2020. We’ve already started down the road of some decommissioning activities associated with it. We’ll stop taking coal towards the fourth quarter of the year. And because of these activities that will allow us to repurpose some of the O&M dollars associated with that facility.

We have been planning for the Boardman -- ceasing coal-fired operations for some time and having a really thoughtful glide path that we’ll be pursuing for the balance of the year and into next.

Okay, understood. And what the PCAM balance at the year end 2019?

We were above the baseline by $5 million. We just -- water and wind were the challenge this year.

Okay. And I know it’s early on in the 2020 hydro season, but any early look on what you’re seeing with your hydro facilities?

The Mid-Columbia is up this year. It’s almost like a flip from last year. Last year, we saw that the instate hydro resources were higher than the Mid-Columbia. Right now, it’s the opposite. The Mid-Columbia is up over closer to 100% and the interstate’s down. So, we still have a lot more weather to go. We’re only in the first part of February. And as we know in Oregon, anything can happen between now and the end of March.

Yes. I would emphasize Jim’s cautious. We’re having very modest temperatures right now for a winter period of time, low precipitation. And so, while the numbers appear to be good, we’re very cautious for the balance of the year and particularly for hydro, but also for wind and for load.

Our next question comes from the line of Agostina Colaizzo from Mizuho. Your question, please?

So, just wanted to know or get a better sense about what would be the main drivers of just like the overall growth in terms of you guys being at the 4% or 6% growth rate?

Well, the range is the 4% to 6%. And I think as Maria was talking about earlier, we have a strong economy here in Oregon. And that’s really a driving factor along with Wheatridge is on track. As we mentioned, Boardman gives us an opportunity to repurpose some of the expenses there to help cover others. And then, we’ve got other cost reductions along with the fact that we are seeing a strong growth in the high-tech and digital services in our service territory.

[Operator Instruction] Our next question comes from the line of Travis Miller from Morningstar. Your question, please?

Good morning. Thank you. I wondering on the IRP timing. Would that have any, and I’m suspecting not, but timing have anything to do with 2020 earnings or growth? And then, when would any kind of impact from that IRP potentially impact that 4% to 6% growth?

Sure. So, the IRP process, first of all, we are hoping to get acknowledgement mid-March, it could be later. And then, we will pursue RFPs and selection of independent evaluator and all of the processes with stakeholders that go along with that. On the renewable side, we indicated that we could seek procurement as late as 2024, or in service as late as 2024, given the extension of the production tax credit. However, that window is between now and then, and we would hope to be able to move faster. Our costumers, as indicated by our Green Future Impact products as well as others, are very interested in seeing us move factor with regards to non-carbon resources.

Does that suggest on more investment opportunities for you, or more just a power purchase agreements and such?

So, we take the least cost, least risk proposals that come our way. We work with an independent evaluator in determining that. And we’ll have a fully transparent and open process as we move through this next year and into 2021.

Yes. Right now, Travis, it’s impossible to tell because it’s we’re going to look at everything that comes through the door.

And then, just kind of a lot wrapped into this question. I was wondering if you could talk a little more about that Avangrid deal, and how that’s going into this Green Future Impact program, the growth there. What does that mean for you guys on a financial side? And then also just the whole idea of getting to more renewable energy in the state. It has a lot in there, but that Avangrid deal and the Green Future Impact, and we’re interested in hearing more about.

Sure. Well, first of all, this is announcement that we made yesterday. It’s 162-megawatt project on the nameplate basis, located in Gilliam County, Oregon, which is just east of The Dalles. The expected output is about 47 average megawatts. It’s a traditional PPA but will meet the needs through ourselves for some of our largest municipal and corporate customers, who wanted to go 100% green faster than our renewable portfolio standard. So in many ways, I sort of think of this as a top up program that will give them opportunity to buy additional solar in addition to the 40% or wherever they want to be in that purchase program. And it varies customer-by-customer to enable them to be 100% green factor than our current trajectory. So, we are very much looking forward to working with Avangrid on this. It’s something we’ve been working with customers for some time on. And there is also a second phase to the project as well that we will continue having discussions with Oregon Public Utility Commission and with others. Jim, do you want to go over any other detail.

The only other thing I’d Travis, as you think about this particular project in context of our IRP that it does not change what we’re asking for in our IRP, in our action plan.

No. I would say, it’s very important to stakeholders that this -- that anything that we do for specific customers that is above and beyond our RPS standards and what we’re achieving through IRPs is incremental.

Okay. And then, do you have the percent of load, I guess, served by that Green Future Impact, any kind of thoughts on where that might be going? Is that an appropriate way to measure that Green Future Impact?

Yes. It’s not going to have a material impact on our overall load.

It’s not a material?

47 average megawatts.

An average of about 2,300…

Yes, 2,300…

I was talking about the whole program right now in terms of numbers of megawatts of hours...

That’s the program that we currently have with contracts and negotiated. We’re in the discussions with regards to next phases. And I think it would be premature to speculate on that. We are seeing interest from some large digital and high-tech companies, which could make that larger. But, we will have to take that on a sort of project-by-project or customer-by-customer basis.

Thank you. Our next question comes from the line of Sophie Karp from KeyBanc. Your question, please?

I was wondering if we could chat a little bit more about the comments on the IRP. And it seems like you guys have a decent, by contemporary standards, load growth, in the state. So against that, we have seen cost, delays, some of the acquisitions of renewable assets. And granted, this is longer term, maybe it’s too early to talk about that, but how should we think about the cadence of your renewable procurement and puts and takes on your range going forward?

So, our integrated resource plan calls for up to addition of about 150 average megawatts of renewables and 600 megawatts of capacity. We will go through the process as we have in the past. It’ll be fairly public. The first is to get the acknowledgement of the IRP; and then, we’ll begin talking with stakeholders about how we’re doing this procurement, looking at RFPs, looking at an independent evaluator, and we’ll be doing that work through 2020 and hope to move expeditiously.In addition, we’re already having some discussions with existing capacity providers. All of the capacity we’re looking for is non-emitting capacity at this point in time. And we will update you on future calls as we have information that will be material.

Sophie, one other thing you need to keep in mind is that we’re going to be following the stair steps associated with renewable portfolio standard, which says in 2025 it’s 27% of our retail load needs to be served; by 2030 it’s 35; 45% in 2035; and eventually 50% by 2040.

Another question that I had, is there something that we should be watching with respect to legislative session in Oregon this year? How is that shaping up so far?

So, we have had a fairly contentious legislative session, and that would followed from last year session. The issues are really around cap-and-trade. It’s complex, it’s changing all the time, it’s a short session. And so, the session will be finished in early March. We, as I noted in my remarks, are supportive of cap-and-trade legislation that supports our customers’ interest in moving to a low carbon energy future but also ensuring that customers do not pay twice, since we’re already bringing on current renewable projects as we’ve discussed in the call, as well as the trajectory that Jim just outlined.

Do you think we’re going to see something done in this session?

We are hopeful, but I would say that it’s too early to call, and anything can happen. But, we are -- we remain very hopeful.

Thank you. Our next question is a follow-up from the line of Julien Dumoulin-Smith from Bank of America.

Is this you again, Ryan?

No. It’s Julien. I just wanted to clarify the earlier response. What is the reasoning behind the pivoting in the growth rates? I just want to understand. I understand that the CapEx can be bulky at times and so therefore lumpy rather. And so therefore, it might not necessarily enable a smooth trajectory. I understand certain years you may or may not be finally rate case. But I want to hear from you guys, exactly, what the reasoning is behind the slight pivot here? And if there’s anything specific that you might be otherwise alluding to?

So, let me let Jim address this. But, first, please know that we are being responsive to investors’ interest for more visibility. And we’ve heard your request for that. Jim?

Yes. Julien, we’ve taken that limiter off of 2018 through 2021 and just saying, on long-term basis, this is our objective. Again, as I mentioned previously, we’re looking at a strong economy in Oregon. We continue to have a lot of immigration into the state, continuing to have a lot of load growth in the high tech sector out there. We actually had a paper company come back on line in the service territory. We’ve got a lot of cost saving efforts that we’ve got going on inside the Company, they’re really showing a lot of promise. And when you start adding all of these things up, I think, we’re really turning in the right direction. And that gave us a lot more confidence in putting out that type of guidance.

Got it. So, this is more about a post ‘21 outlook than it is saying anything specific to any given year. Right?

Absolutely. Sometimes it will be higher and sometimes it will be lower, but it’s -- this is where we’re looking towards the long-term future.

Got it. And since we’re talking about ‘21 and the outlook through ‘21, I know we’re talking about cost cuts in ‘20 and then ‘21 on the subsequent question. I suspect that while you’re not giving guidance per se that you still feel confident in being able to achieve that compound and growth rate off ‘18 into ‘21 given what you know today, given your cost trajectory, your rate, case decisions, etc. Right?

Yes. And please know that we’re working across our Company to be more efficient and effective and to serve customers’ needs as those that accelerate not only for green energy but for responsiveness and services that are commensurate with industries outside of the utility business.

Our next question comes from the line of Vedula Murti from Avon Capital. Your question, please?

Okay. Not to beat a dead horse here, just so I understand kind of what we were just discussing with Julien is basically the idea that having set out the parameters for ‘18 through ‘21 that the -- ex that 4 to 6% type of compounded growth rate is now kind of being targeted like post ‘21 as well going forward?

Yes.

Okay. Secondarily, you mentioned in one of your slides here about 1Q approval of the transportation electrification plant. Can you give us a sense as to the potential capital dollars that would be -- that could be associated with that over say a reasonable planning period? And whether and I -- it doesn’t -- I’m not sure that there’s a whole lot associated with that that would be in the CapEx plan currently.

So, that’s a great question. And this was something that was just approved yesterday, and we’re very pleased. It really focuses on physical infrastructure, customer service, supply energy management, our distribution operations and demand reliability management.As you know, this is an area that is very new and it’s hard to forecast. We could see a need over the long term for upwards of 5,000 new charging ports as well as other infrastructure. But, in the near term, we’re probably looking at fairly modest growth, maybe ballpark, $100 million over about five-year time period.So, it’s really around supporting the transformation of the sector in Oregon. Transportation is the largest emitter of greenhouse gases. And we already are working very closely with a number of partners, in particular TriMet, which is one of the larger transit authorities in the country, is working very closely with us on their some existing bus routes as well as could go over some of their bus depots. And we have a number of other partnerships with municipalities and others advancing charging infrastructure and working closely with us.

Okay. And with the IRP then going to the RFP, when the request for proposals go out, my recollection in the past is that you have self build, own options that you propose along with obviously third parties that the independent evaluator will then assess. And in past, I think you’ve indicated that there are structural disadvantages for you being the incumbent utility in regards to tax attributions and things of that nature that usually tend to favor the third-parties with regards to the ultimate selection at the end of the RFP. Is there anything that might be different this time or that could -- or anything that might be more advantageous to you this time?

So, it’s just too early to tell. I think in your comments, there’s just a lot of speculation there. We’ll go through open and transparent process with the PUC. We’ll work with independent evaluator. And if we put in a bid or we will hope that, it will be competitive. We have a good track record, but it’s important that we add the lowest cost, least risk projects into our customer’s portfolio.

And just, I think you answered this earlier, but when will the final outcome of the RFP and the actual selection of Vietnam be announced. Is it around the end of the year?

Again, it’s just too early to speculate on that. But, thank you for your questions.

Thank you.

Thank you. This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Maria Pope for any further remarks.

Thank you. We appreciate your questions and interest in joining us for today’s call. We invite you to join us in April for Portland General Electric’s first quarter 2020 results. Thank you.

Thank you ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.