Portland General Electric CEO Discusses Q3 2011 Results - Earnings Call Transcript

Nov. 3.11 | About: Portland General (POR)

Portland General Electric Company (NYSE:POR)

Q3 2011 Earnings Conference Call

November 3, 2011 11:00 AM ET

Executives

Bill Valach – Director of Investor Relations,

Jim Piro – President, CEO

Maria Pope – Senior Vice President of Finance, CFO and Treasurer

Analysts

Sarah Akers –Wells Fargo

Neil Mehta – Goldman Sachs

James Bellessa – DA Davidson

Mark Barnet – Morningstar

Operator

Good morning everyone and welcome to Portland General Electric Company’s Third Quarter 2011 Earnings Results Conference Call. Today is Thursday, November 3, 2011. This call is being recorder and as such, all lines have been placed on mute to prevent any background noise.

(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.

Bill Valach

Thank you Jay [ph]. And good morning everyone, and we’re very pleased that you’re able to join us today. Before we begin our discussion, this morning I’d like to make our customary statements regarding Portland General Electric’s written and oral disclosures and commentary.

There will be statements in this call that are not based on historical facts and as such constitute forward-looking statements under current law. These statements are subject to factors that may cause actual results to differ materially from the forward-looking statements made today.

For a description in some of the factors that may occur that could cause such differences, the company requests that you read our most recent form 10-K and form 10-Qs. The form 10–Q for the third quarter 2011 was available this morning at portlandgeneral.com. The company undertakes no obligation to update publicly in any forward-looking statements whether as a result of new information, information future events or otherwise.

These safe harbor statements should be incorporated as any part – as part of any transcript of this call. Portland General Electric’s third quarter earnings were released before the market opened today, and the release is available at portlandgeneral.com. Leading our discussion today are Jim Piro, President and CEO, and Maria Pope, Senior Vice President of Finance, CFO and Treasurer.

Jim will begin today’s presentation by providing a general overview of the quarter’s result, and our strategic capital projects, then Maria will provide more detail around the quarterly results, and key regulatory proceedings. Following prepared remarks, we will open the lines for your questions, and now it’s my pleasure to turn the call over to Jim.

Jim Piro

Thank you, Bill, good morning and thank you for joining us. Welcome to Portland General Electric’s 2011 Third Quarter Earnings Call. We delivered strong operational performance in all sectors of our business during the quarter.

As a result of the continued increase in energy received from hydro resources, combined with low cost purchase power, we were also able to effectively manage our power supply and economically displaced a significant amount of our thermal generation.

We also continued to move forward to implement our business strategy to meet the growing energy needs of our customers. Now on to the quarter’s results. PGE’s net income for third quarter 2011 was $27 million or $0.36 per diluted share compared to $49 million or $0.65 per diluted share for the third quarter 2010.

It is important to note that there were some non-recurring items that positively impact the third quarter last year with the most significant being $20 million pretax collection for SB 408. This amount was reversed in the fourth quarter 2010. We are reaffirming our full year 2011 earnings guidance of $1.90 to $2.05 per diluted share and plan to provide 2012 earnings guidance in our fourth quarter earnings release schedule for February of next year.

Now let’s move on to the economic outlook in our operating area. We continue to see customer growth with the addition of 2400 new customers since the third quarter of 2010. According to the Oregon employment department, Oregon seasonally adjusted unemployment rate remained flat at 9.6% in September.

This compares to the U.S. average of 9.1%. Oregon’s private sector payroll grew faster then the national average with growth of 2.3% in the last nine months compared to the same period last year versus 1.6% for the U.S. The Oregon office of economic analysis forecast that jobs in Oregon will continue to grow faster than the U.S. average during the next several years.

Growth is likely to be concentrated in higher wage jobs, reflecting activity and high technology manufacturing as illustrated by the substantial expansion project currently underway at Intel. Including the effects of energy efficiency measures, PGE’s weather adjusted retail energy deliveries increased approximately 0.7% in the third quarter 2011 compared to third quarter 2010.

This increase was driven by growth in the industrial sector specifically the paper production industry excluding two large paper companies total weather adjusted deliveries for the quarter would have declined 0.4% compared to 2010. This decline driven by lower than anticipated residential loads during July and August has led us to revise our projected weather adjusted deliveries for the full year of 2011.

From an increase of 1% to an increase of approximately one-half of a percent. This again excludes the impacts of the two large paper production customers noted previously. One of which has access to the wholesale market through PGE at prevailing market prices.

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

The revenue impact of reduced loads during the third quarter is partially offset by our decoupling mechanism which Maria will discuss later. Now an update on our strategic initiatives starting with operational excellence.

We continue to deliver excellent operating performance company wide during the third quarter. Our distribution reliability metrics remain strong and generation plan availability was high. The gas turbine upgrade we completed during the second quarter at our Coyote Springs Plant is performing at a higher level than expected with a 12% increase in production versus our expectation of approximately 7%.

We also continue to maintain high levels of customer satisfaction. Based on third quarter results, we continue to rank in the top cortile for overall customer satisfaction among residential and general business customers and in the top textile [ph] for large industrial customers.

Our leadership team continues to put a special emphasis on operational improvements and sustainable cost efficiencies of the long term. We are meeting early milestones on a number of initiative already underway.

These company wide programs are focused on streamlining operations by leveraging technology and refining work processes. Our goal is to reduce the cost of service we provide to our customers while maintaining top cortile customer satisfaction.

Now an update on our resource strategy starting with an update on Boardman. We continue to make progress on the Boardman 2020 plan to address the new air emission requirements at our coal–fired facilities.

New low–nox burners installed this spring to reduce nitrogen oxide emissions are functioning well. Retrofits to control mercury emission have also performed well in testing this fall.

We expect to place the mercury control system in full operation late this year, or early next year. We are waiting action on the EPA utility MACT rule. PGE and other submitted comments to EPA this summer regarding the compatibility of the agencies proposed rules with our Boardman 2020plan.

EPA recently requested a one month extension to December 16th to issue those final rules. Now I’ll move on to our integrated resource plant which the Oregon Public Utility Commission acknowledged last November. Our IRP action plan includes energy efficiency measures as well as the addition of new renewable resources, gas–fired base load, and peaking generation and transmission to meet our retail load requirements.

We submitted a draft request for proposals for capacity of resources to the OPUC in July, and plan to submit separate RFPs for energy and new renewable resources. However the OPUC issued an order in September directing us to combine our capacity and energy RFPs.

We expect this to delay the decision on both capacity and energy resources by six to 12 months, and we will work collaboratively with the commission and stake holders to determine the most effective structure for the combined RFP. We still expect the combined RFP to include PGE benchmark resources to compete with other market bids.

In the meantime, preparations are also under way to present a draft RFP for renewable resources to the commission for approval which should result in a short list of potential renewable projects by mid 2012.

We intend to bring the selected resources online as needed to meet Oregon’s Renewable portfolio standard requirements for 2015. PGE plans to include a benchmark resource in this RFP as well. The IRP action plan also includes our Cascade Crossing Transmission Project.

We’ve been working with stakeholders in the region to plan the project and are preparing to file a site certificate application with the State of Oregon in the first quarter of 2012. Subject to obtaining all necessary approvals, the project is expected to be in service in late 2016 or early 2017.

We are pleased that President Obama’s administration recently named the Cascade Crossing Project as one of seven grid modernization pilot projects to participate in a new federal Rapid Response Team process. The goal of the Rapid Response Team is to streamline federal permitting and increase cooperation at the federal, state, and tribal levels.

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

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

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

Maria Pope

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

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

Net income was also impacted by a pretax $4 million loss related to a decline in the fair value of non–qualified benefit plan trust assets in the third quarter of 2011, compared to a pretax $3 million gain in the third quarter of 2010. Excluding the decrease for Senate Bill 408, total operating revenues for the third quarter we’re largely flat compared to the third quarter 2010.

A 3.9% price increase authorized in the 2011 general rate case and a 1% price increase related to the shortened operating life and decommissioning cost of the Boardman’s coal plant, resulted in a revenue increase of $14 million.

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

With residential use down in the third quarter of 2011, we recorded a $1 million collection compared to no collection or refund in the Third Quarter of 2010. This partially offsets the revenue impact, a reduced load that Jim mentioned earlier.

In the third quarter of 2011, PGE received 24% more energy from PGE owned and contracted hydro resources than in the third quarter of last year. As river run off as averaged significantly above normal.

Overall, purchase power and fuel expense decreased 10% quarter-over-quarter. With abundant hydro in the northwest also market prices were low. Consequently, we economically displaced a significant amount of our thermal generation with wholesale power purchases.

As a result, thermal generation supplied only 35% of retail load in the third quarter of 2011 compared to 50% of retail load in the same period of 2010 excluding impacts of the portion of power cost refunded to customers. PGE owned and contracted hydro generation resulted in a positive pretax impact of approximately 4 million in the third quarter of 2011 compared to a negative pretax impact of approximately 3 million in the third quarter of 2010.

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

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

Now, I’ll update you on a few regulatory items. For 2011, the PCAM dead range is from $50 million below to 30 million above the baseline for net variable power cost. After which a 90–10 sharing occurred. As we’ve discussed favorable hydro conditions and low cost wholesale power resulted in actual net variable power cost seeing approximately 36 million below the baseline for the first nine months of 2011.

This compares to 11 million below the baseline for the first nine months of 2010. Under the PCAM as net variable power cost are below the dead band and we are expected to exceed an 11% regulated return on equity, we have recorded an estimated power cost refund to customer of 16.5 million year–to–date of which 4 million was recorded in the first quarter and 8 million in the second quarter.

And the third quarter refund would have been approximately 7 million. However, the 11% regulated ROE earnings test reduced our refund for the quarter to approximately 4 million.

PGE filed our estimates of power cost for 2012 earlier this year. Yesterday, the OPUC issued an order of the 2012 annual power cost update (inaudible) which resulted in less than 0.5% change from our original filing. And approximately, a 1% decrease in customer prices effective January 1st, 2012.

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

In addition, administrative and general expense increased 8 million quarter-over-quarter primarily from the increased legal fees, prior employee benefit expenses and effective compensation.

Now, on to financing and liquidity. We are active in the wholesale marketplace entering into forward contracts for natural gas and power to manage our exposure to commodity price risk and minimize volatility for our customers. As of September 30th, we posted approximately 151 million collateral with wholesale counterparties with consisted 83 million in cash and 68 million in letters [ph] of credit.

This compares to approximately 354 million in collateral posted with wholesale counterparties as of September 30, 2010. We have 600 million in revolving lines of credit of which 511 million were available as of September 30th including the addition of 97 million in cash our total liquidity at the end of the third quarter was 608 million. While we target a capital structure of 50% debt and 50% equity, periodically we are higher or lower.

As of September 30th, our equity ratio was 48%. We estimate capital expenditures and preliminary engineering to be approximately 300 million in 2011 and about the same for 2012.

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

Jim Piro

Thank you, Maria. Third quarter of 2011 performance reflects our focus on operational excellence including continued flexibility in our power supply operations, high customer satisfaction and prudent management of our operating cost.

We are moving forward with implementation of our Boardman 2020 plan as well as our IRP action plan. And we will continue to position the company for future investment opportunities that deliver value to our customers and a competitive return for our shareholders.

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

Question-and-Answer Session

Operator

(Operator instructions). And we’ll go first to Sarah Akers with Wells Fargo.

Sarah Akers –Wells Fargo

Hey, good morning.

Jim Piro

Good morning, Sarah.

Sarah Akers –Wells Fargo

Can you talk about the revised schedule for the RFP? I know you said that the combined will put about a 6 to 12-month delay but in terms of – if you’re winning the – if you’re self-build option is a winning bid, when is the earliest you could begin construction on a peaking gas unit under the revised timeline?

Jim Piro

Generally, the schedule we’re looking at – and I’ll start with the combined capacity and energy RFP, we would hope to issue to draft RFP to the commission probably by the end of the year. We’re still working on trying to put those two RFPs together and get all the language developed.

Then it’s going to take at least about a quarter we hope for the commission to issue an order on that RFP and that’s really the wildcard how long it takes to get to that regulatory process but by the end of the first quarter, the PUC has rendered their decision on the RFP, we would then start the process with the hope that by the end of the second quarter, we might have a short list. So that kind of generally what we’re looking at for the combined capacity and energy resource.

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

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

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

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

Sarah Akers –Wells Fargo

Thank you very much. And then quickly on cascade crossing, how much of that project is – how much would your CapEx be of that project?

Jim Piro

You know, the project is somewhere between $800 million to $1 billion and it really depends on whether we build a single circuit or a double circuit line, and if we build a double circuit line, we would likely have a partner in the project that we take some of the capacity as we’ve mentioned before. We have been in discussions with Pacific Core and they do have interest – a share of the line.

We’re also that working with Bonnabel Power on their interest in the line and what capacity they might want on that line, so much of that commercial discussion is going on.

So, you know, if it’s a single circuit line just for our needs, it would be somewhere in the $800 million range, double circuit it’d be a billion but then we would take – we wouldn’t take the whole project down, there’d be other partners that would have a share of the project.

So, you know, we’re still kind of in the fluid state of trying to figure out exactly the commercial operation – commercial arrangements with the various counter parties and that would form us on the exact sides of the project in the investment.

Sarah Akers –Wells Fargo

Thank you.

Operator

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

Neil Mehta – Goldman Sachs

Hey, Jim. Hi, Maria.

Maria Pope

Good morning.

Jim Piro

Hi, Neil.

Neil Mehta – Goldman Sachs

So on demand, it’s coming a little softer on a weather normal basis than was guided to this year. What do you attribute the Delta 2 especially in light of some of the good things we’re seeing in the local economy including the D1X project?

Jim Piro

You know, the softness in the third quarter was really in the residential sector and that could have been due to the culmination of weather and maybe additional conservation measures that customers might have been putting in place; we saw some rebound in September.

So we generally feel like that maybe just be a short lift in the curve. We are seeing some very good activity in the commercial market obviously with Intel D1X project and the supporting people that will bring in facilities to support that project. That’s going to add a significant number of jobs.

They also – other company SolarWorld continue to look at expansions and we have another solar company looking in the Portland area to construct facility. So, generally, we see some positive signs, Bowen is doing well. That’s sort of our large customers here and they’re doing well also. So there’s some really good signs in some of the commercial industrial sectors and so I think with the softness in the residential market might have been a combination of just the conservation measures people are putting in place during the summer and we didn’t have really warm weather also so that could have been some of the impact.

Neil Mehta – Goldman Sachs

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

Jim Piro

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

Neil Mehta – Goldman Sachs

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

Jim Piro

Two things that – maybe detail around some of the other corporate cost but we are going to a pretty significant efficiency effort within the company, the streamliner operations by using technology and so we’re doing a number of projects in the company that will improve our performance and get better service at lower cost.

And those projects are starting to come online next year and will continue for the next couple of years. That will hopefully help moderate our cost. We have a number of retirements because we have an aging work force about a third of our employees potentially retiring in the next seven to eight years that we can take advantage of those retirements by using technology and up scaling our employees and taking advantage of that. So those are some of the things we’re doing on the operation side.

The other thing is we’re looking on the generation side for a continued efficiency improvements of the plant through generation excellence and reliability center maintenance to really improve our plant performance. Maria you want to talk on the purpose side?

Maria Pope

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

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

Neil Mehta – Goldman Sachs

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

Maria Pope

Sure. I think a lot of it starts with our longer term forecast. And we do take a look at the timing of capital expenditures in large projects and when they will come in line.

In addition, we’re very fortunate to be in a service territory where there is quite a bit of growth coming online, led by Intel but really across many of our industrial sectors. And with that combined with really prudent and careful cost reductions leave us to have some flexibility around our rate cases.

And so, we’re currently looking at a rate case in about 2014 that would be the effective test year, which is pretty consistent with what we talked about on the call last time.

Neil Mehta – Goldman Sachs

Got it. Thank you so much, Jim, Maria.

Jim Piro

Thanks, Neil.

Maria Pope

Thank you.

Operator

Moving right up to James Bellessa with DA Davidson.

James Bellessa – DA Davidson

Good morning.

Jim Piro

Good morning, Jim [ph].

James Bellessa – DA Davidson

The energy efficiency question was answered. So, I have two other questions.

The pattern of depreciation and amortization last year and this year with their first and second quarters is at one level. And then it jumps up in the third quarter. Is there something seasonal that happens in the third quarter?

Maria Pope

What happens in particular is that the amortization of Boardman came online and so that jumped it up. We also had some slight adjustments in other miscellaneous areas in the Third Quarter.

But you should see roughly the run rate would be pretty consistent going forward with where we are right now, as Boardman will be there through the balance of its life.

James Bellessa – DA Davidson

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

Maria Pope

Sure. As you probably have figured it out, our tax rate, year-to-date is about 26% and for the quarter was about 29%.

The biggest issue affecting our tax rate is really production tax credits and those that we’re receiving as the wind blows at our Biglow Canyon wind farm. But on average, we’ve been on an annual basis just under about 30%. That’s sort of what I would use for your model.

James Bellessa – DA Davidson

Thank you very much.

Jim Piro

Thanks, Jim.

Operator

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

Mark Barnet – Morningstar

Hey. Good morning, everyone.

Jim Piro

Good morning, Mark.

Mark Barnet – Morningstar

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

Maria Pope

No. At this point in time, that’s not the case. There were not any – in the quarter there were not any movement on direct to access.

What we saw was just slight changes. They’re for about 182, 158 and that’s really on a year–to–day basis were at about 489. And so, those are customers who were moving – if you can see direct access. And then total industrial is 931 for the quarter.

So some movement, but not a big deal overall.

Mark Barnet – Morningstar

Okay. And then I guess so far year-to-date hydro has been fairly strong. I’m wondering if that close conditions have continued thus far into the third quarter or if there’s kind of a change?

Jim Piro

Well, it’s starting to rain again and we don’t know if this is a trend. We tend to look at the weather patterns. And again, this looks like a La Niña year coming up which tends to suggest it’ll be wetter in the northwest. But you know, those are just current projections and we’re not ready to take them to the bank yet.

Mark Barnet – Morningstar

Okay. All right. I appreciate the colors. Thank you.

Jim Piro

Thanks.

Operator

(Operator instruction).

Jim Piro

It looks like we have no further questions. We appreciate your interest in Portland General Electric and look forward to seeing some of you next week at EEI. And invite you to join us when we report on fourth quarter 2011 results in February 2012. Thanks again.

Operator

That does conclude today’s conference. We thank you for your participation.

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