Aug 7, 2012
Executives
Bill Valach – Director, Investor Relations, Jim Piro – President and CEO Maria Pope – Senior Vice President, Finance, CFO and Treasurer
Analysts
Neil Mehta – Goldman Sachs Brian Russo – Ladenburg Thalmann Andrew Weisel – Macquarie Capital Mark Barnett – Morningstar Sarah Akers – Wells Fargo Mike Bates – D.A. Davidson
Operator
Please standby, we are about to begin. Good morning, everyone.
And welcome to Portland General Electric Company’s Second Quarter 2012 Earnings Results Conference Call. Today is Tuesday, August 7, 2012.
This call is being recorded and as such, all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period.
(Operator Instructions) For opening remarks, I would like to turn the conference call over to Portland General Electric’s Director of Investor Relations, Mr. Bill Valach.
Please go ahead, sir.
Bill Valach
Thank you, Anne, and good morning, everyone. I’m pleased that you’re able to join us today.
Before we begin our discussion this morning, I’d like to point out that we have prepared a PowerPoint presentation to supplement our discussion today and we’ll be referencing slides throughout the call. For those of you accessing the call over the phone, you can find these slides on our website at portlandgeneral.com.
Referring to slide two, 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 of some of the factors that may occur that could cause such differences, the company request that you read our most recent Form 10-K and Form 10-Qs.
The Form 10-Q for the second quarter 2012 is available on our website at portlandgeneral.com. The company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise, and this Safe Harbor statement should be incorporated as part of any transcript of this call.
Portland General Electric’s second 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 results and our strategic capital projects. Then Maria will provide more detail around the quarterly results and following prepared remarks, we will then open the lines up for your questions.
It’s my pleasure to turn the call over to Jim.
Jim Piro
Thank you, Bill. Good morning, everyone, and thank you for joining us.
Welcome to Portland General Electric’s second quarter 2012 earnings call. As slide four shows, PGE’s second quarter net income was $26 million or $0.34 per share.
We are reaffirming our 2012 earnings guidance of $1.85 to $2 per share. As you can see on slide five, today, I’ll give you an update on Oregon’s economy and discuss operational excellence, as well as the progress we’re making on our strategic initiatives, which drive business growth.
Then Maria will provide a financial update, detailing PGE’s second quarter results, liquidity and our outlook for the remainder of 2012. Now, let’s move on to the economic outlook in our operating area.
Oregon’s June unemployment rate of 8.5% is 1% lower than in June of last year and the unemployment rate in our operating area is averaging 7.3%, which is also nearly 1% lower than a year ago. The Portland metro area gained 21,000 jobs between June 2011 and June 2012, which represents a 1.3% gain.
In the first six months of 2012, our new residential connects increased by 2,900, compared with 850 added during the same period last year. So far, this year our loads are up about 1% over 2011 weather adjusted levels, reflecting the growth we are seeing in all sectors.
Now on to operational excellence. We continue to deliver excellent operating performance company-wide.
Our system operating extremely well, our distribution reliability metrics remain strong and generating plant availability was high. We are also very pleased to be the top ranked investor-owned utility in the nation for residential customer satisfaction and in the top decile for business customer satisfaction in the J.D.
Power and Associates 2012 Electric Utility Satisfaction studies for Residential and Business Customers. This is a great recognition of the hard work and effort of our employees, who dedicate themselves to meeting our customer’s needs.
We are continuing our benchmarking and best practices work to identify and implement process changes and technology improvements that result in efficiencies throughout the company. Right now, we are focusing on our information technology in transmission and distribution areas.
Now I will give you an update on our progress executing our integrated resource plan, action plan. Please refer to slide six.
The Oregon Public Utility Commission approved our capacity and energy RFP, and it was issued for competitive bidding on June 8th. Independent power developers and producers can bid into the RFP with purchase power agreements, build, own transfers or asset sales and they have the option to build on PGE’s benchmark site, as long as the plants are built to our specifications and would be owned and operated by us.
We submitted PGE’s benchmark bids last week and all other bids are due tomorrow. We are targeted an initial short list selection in November, with a final decision in early 2013.
We also moved forward with our Renewable RFP. As you can see on slide seven, we filed a draft RFP with the OPUC for review on July 25th.
The OPUC has scheduled a hearing in late September and upon OPUC approval, we will issue the RFP. PGE expects to submit its benchmark bid in the fourth quarter and we hope to make a final resource decisions in late 2012 or early 2013.
We are also making progress on our Cascade Crossing Transmission Project, which you can see on slide eight. We are currently developing and providing information for the Draft Federal Environmental Impact Statement and the environmental analysis for the confederated tribes of the warm springs.
We are in the midst of negotiations with BPA on agreements that will enable the integration of the project into the Northwest power grid, with specifically regarding their potential participation in the project as a co-owner and with confederated tribes of the warm springs on project easements. Although, the project remains in the feasibility and permitting stage, we still expect to receive the necessary permits in 2014 and are targeting an in-service date of late 2016 or early 2017, subject to receiving all necessary approvals.
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
Thank you, Jim. As you can see on slide nine, net income for the second quarter of 2012 was $26 million or $0.34 per share, compared with $22 million or $0.29 per share for the second quarter of 2011.
For the first six months, net income was $75 million or $0.99 per share versus last year, when we earned $91 million or $1.21 per share. Quarter-over-quarter favorable power supply operations and a lack of customer refunds drove earnings growth.
This more than offset lower retail energy deliveries, resulting from this year’s -- this spring’s mild weather. Year-to-date earnings decreased due to lower retail energy deliveries and less of a benefit from favorable power supply operations, coupled with higher pension expense and increased delivery system costs in the first quarter.
Total retail revenues for the second quarter were $394 million, a $4 million increase from the second quarter of last year. While we saw a decrease in both the average retail price and the volume as energy sold, we did not record a customer refund under the Power Cost Adjustment Mechanism or PCAM this quarter, compared with the $8 million refund we recorded in the second quarter of 2011.
Retail energy deliveries decreased quarter-over-quarter, primarily due to the mild spring weather, compared with much colder temperatures last year. When energy deliveries are adjusted for weather and for certain industrial customers that minimally impact margins, loads are up approximately 0.5% over the second quarter last year and are up about 1% year-to-date.
For full year, we expect approximately 1% load growth over 2011 weather adjusted levels, which is at the low end of our range. As you can see on slide 11, purchase power and fuel expense was $156 million for the quarter, compared with $169 million a year ago, driven by an 8% decrease in average variable power costs and low natural gas prices.
Net variable power costs were $5 million below the PCAM base line in the second quarter for a total of $10 million below the base line for the first six months of 2012. This is still within the lower deadband of the PCAM and the 2012 earnings are not expected to exceed the regulated earnings test and so we have not recorded a refund to customers this year.
In comparison, power costs were $29 million below the baseline for the first six months of 2011, and we recorded an estimated refund to customers of $12 million. Generations from PGE-owned and Mid-Columbia hydro projects has been favorable this quarter, exceeding our annual power cost update tariff or AUT, forecasted by 16%.
This is slightly lower than the favorable hydro experienced during last year’s second quarter, which exceeded our forecast by 19%. Overall, favorable hydro conditions and low natural gas prices have contributed to lower purchased power costs.
Generations at our Biglow Wind Canyon decreased 12% quarter-over-quarter, due to unfavorable wind conditions and was 10% below the AUT forecast. Generation at our thermal plants represented 5% of our total retail load requirement for the second quarter, compared with 10% a year ago, as our thermal plants were economically displaced by lower costs purchased power.
Now moving on to slide 12, production, distribution and administrative costs totaled $107 million for the second quarter, up $1 million from the second quarter of last year. Administrative and general expense increased primarily due to higher pension costs, those offset by lower production and distribution expense, as maintenance work at our Boardman and Colstrip plants returned to normal levels after significant maintenance outages last year.
Total O&M expense for the quarter is in line with our expectations and approximates the quarterly run rate for the full year. Depreciation and amortization expense for the quarter was $63 million, up $8 million from a year ago, due to a tax credit amortization that finished at the end of 2011 and increased depreciation at our Boardman coal plant.
Both of these increases were offset in retail revenues. Depreciation and amortization also includes a $4 million decrease related to the deferral of costs associated with capital projects, for a total decrease of $8 million for the first six months of 2012.
For the full year, we expect to defer $17 million. Overall, depreciation and amortization of $60 million to $65 million is an approximate quarterly run rate for the year.
Capital expenditures this quarter were $68 million and totaled $137 million for the first six months of 2012. We expect capital expenditures for the full year to be $323 million.
Turning to slide 13, we are focused on maintaining a strong balance sheet, adequate liquidity and investment grade credit ratings. In June, Moody’s upgraded our outlook on the company from stable to positive.
As of June 30th, we had $629 million in available revolver capacity and excess cash. We target a capital structure of 50% debt and 50% equity.
And at the end of the quarter, we had 49% equity. We do not expect to issue debt or equity in 2012.
Depending on the outcome of RFP’s, we will assess our need for additional debt or equity. Given our cash from operations and additional debt capacity, assuming the same capital structure, we expect to finance approximately $500 million of capital expenditures annually before accessing the equity markets.
We are on track to be within our full year earnings guidance range of $1.85 to $2 per share as shown on slide 14. While we have reduced our load forecast, we have already benefited from favorable power supply conditions.
In closing, we continued to focus on financial objective that supports our core utility business, including improving our earnings performance and maintaining a strong balance sheet that supports future growth initiatives. Jim?
Jim Piro
Thank you, Maria. Our performance during the second quarter reflects our continued focus on operational excellence.
Moving forward, we will continue to focus on our core business strategy, and we are positioning the company for future investment opportunities that deliver value to our customers and our shareholders. Operator, we’d now like to open the call for questions.
Operator
Thank you very much. (Operator Instructions) We will take our first question from Neil Mehta with Goldman Sachs.
Neil Mehta – Goldman Sachs
Good morning, Jim and Maria.
Jim Piro
Good morning, Neil.
Neil Mehta – Goldman Sachs
How are you thinking about the timing of your next general rate case? Is it fair to assume 2013 filing for 2014 implementation?
Jim Piro
We are in the processing of planning for our 2014 rate case. We’re right now in the budget phase of our business and we’re putting budgets together.
We’ll look through all the cost items and look at our forecast around loads and other items. And we’re moving forward with that plan, but until we make a final decision, it’s not filed.
So we will – if we do file, it will be filed in February of next year.
Neil Mehta – Goldman Sachs
Got it, Jim. And the weather normal demand level of 50 basis points in the second quarter, how does that change the way you think about the long-term demand growth of 1.7% that you embed in your IRP?
Jim Piro
That’s a long-term forecast. Maria, you can provide a little bit more detail on that?
Maria Pope
As we look at our weather adjusted load growth, we’re nicely up on a residential basis about 0.7%, commercial up about 1% and then industrial up about 1.2%. Now that’s year-to-date and on a weather-adjusted basis, excluding some customers that don’t impact margin and are little bit more volatile.
When we look out long-term, we are – we continue to look at loads growth between 1% to 2%. And as we look at our industrial customers in particular, this past year, 70% of our industrial customers loads are up and we’re very pleased to see, not only growth in the high-tech sector led by Intel, which is building on the largest fabs in the world in our service territory, as well as new datacenters that are currently being constructed and others that are in the works.
Neil Mehta – Goldman Sachs
Got it. And the last question for me is on the capacity and energy RFP.
Will we know the names of the competitive bids when they are filed tomorrow?
Jim Piro
No. Most of that’s all held confidentially, not only to protect the bidders but to keep the process very clean in terms of what’s going on.
We may be able to release some general statistics, but we haven’t made that decision yet.
Neil Mehta – Goldman Sachs
Meaning the number of bidders that participated?
Jim Piro
That’s correct. Just some very general numbers and we may provide that to the OPUC at some future briefing.
Neil Mehta – Goldman Sachs
Okay. Thank you very much.
Jim Piro
Thanks, Neil.
Operator
We’ll take our next question from Brian Russo with Ladenburg Thalmann.
Jim Piro
Good morning, Brian.
Brian Russo – Ladenburg Thalmann
Hi. Good morning.
Just on Cascade Crossing, it seems like you’re still committing to the 2016, ‘17 start date. I’m just curious, how confident are you in that, since we’ve seen a variety of delays in other Northwest transmission projects?
Jim Piro
Well, Brian, these are complex projects and they are 50-year assets. So they do take time to get constructed and build and get through the process.
You’ve got to keep a focus on trying to get them to the finish line. But as we’ve seen across the country, sometimes they take a little bit longer just because of the complexity of the environmental assessment process that we have to go through.
We’re still driving towards that date and our folks are working hard. But we’ll have to see how it plays out.
Until we see the draft, DEIS and see what kind of issues come up, we won’t know absolutely for certain. But that’s our goal right now to start at that timeframe and get it completed by ‘16,’17.
But the processes, we have to go through the processes. Again, these are long-term investments that provide long-term reliability to the grid and if they happen to split the year, it’s not the end of the world in terms of what need to happen.
But clearly, we’re committed to moving forward with the project.
Brian Russo – Ladenburg Thalmann
Okay. And remind us how this capital deferral works?
I think you are assuming $17 million in your 2012 guidance. Just want to understand the mechanics a little bit better on that?
Jim Piro
Good question. Maria, you want to cover that for Brian.
Maria Pope
Sure. Good morning, Brian.
We had, as you’ll remember a couple of projects that were part of our last rate case that had not been completed at the time. And as such, we put those under service deferral mechanism.
There was total of just over $90 million in capital spent. Those projects have now been completed and to the extend we have an ROE under 10% on a regulated basis.
The revenue requirements associated with those projects comes into play and that totals about $17 million on an annual basis, $8 million of which we have already booked it to-date.
Jim Piro
Okay. Got it.
So, you are currently earning under a 10%, and are utilizing this capital deferral of $17 million to support 10% in ‘12. And I guess that could be in the case in ‘13 until the next rate case?
Maria Pope
Yeah. Absolutely.
And we reflect it as a decrease in depreciation until our next rate case.
Brian Russo – Ladenburg Thalmann
Okay. Thank you very much.
Jim Piro
Yeah. Brian, one other clarity on that and just so you understand is that the – this works in concert with the PCAM too, in terms of, the deferral can go down if you will if we go beyond the deadband in the PCAM because of the ROE test.
Brian Russo – Ladenburg Thalmann
Okay.
Operator
We’ll take our next question from Andrew Weisel with Macquarie Capital.
Andrew Weisel – Macquarie Capital
Hi. Good morning guys.
I want to elaborate if you can. I guess, you can’t say too much about the RFP and competing bids.
So I was hoping you could talk a little specifically about Troutdale, which seems to come up in the media a bit as being one of the, maybe, leading contenders if you will. Can you talk a little bit about your sort of pros and cons when you think about things like tax abatement and transmission needs?
Jim Piro
We don’t know a lot about that project specifically. If they bid in the process, they will be evaluated with all other bidders under the scoring system we have.
I don’t know the particulars of that side of whether they have -- I know they have some tax abatements for that site. We have the same for the Cardiff site as well as the Port Westward site.
But in terms of transmission and things, that’s really under their responsibility. So I really can’t comment on that.
Andrew Weisel – Macquarie Capital
Okay. Fair enough.
Then, if I heard you correct about the equity needs in the future, sounds like nothing this year and depending on the RFPs, maybe something in the future. If I heard correctly, you expect to finance $500 million of CapEx without accessing capital markets, is that right?
And if so, does that mean if you’re successful in your self-bidding plans, maybe somewhere around the middle of 2014 would be the right ballpark?
Maria Pope
So just to clarify, we would -- at $500 million that does include accessing debt markets. And keeping roughly our capital structure about the same as it is today and targeted at that 50/50 level.
After that, we can either adjust our capital structure. And it has over time gone up or down by about three or four percentage points versus our target, or access the equity markets for additional equity capital.
The timing of which is the dependent upon the timing of the capital projects and the number that we would be completing.
Andrew Weisel – Macquarie Capital
Okay. Thanks a lot.
And lastly then on the dividend, you mentioned in the press release, historically the increases have been about 2% to 4% per year. How should we think about future dividend increases and how related those might be to CapEx needs about the new generation projects?
Jim Piro
Well, we have a policy we’ve currently laid out there that we want to pay somewhere -- pay out essentially between 50% and 70% of earnings. And so as we grow earnings, we would like to continue to grow the dividend to reward our shareholders for continuing to invest in the business.
And we do have capital needs in the future, so we may be a little more conservative at the lower end of that. But each year, we reevaluate where we are with our earnings and with our dividend and make a decision on an annual basis whether to increase it.
We’ve had a history of continuing to increase the dividend over time.
Andrew Weisel – Macquarie Capital
Thank you very much. I’ll pass it along.
Jim Piro
Thank you.
Operator
(Operator Instructions) We’ll take our next question from Mark Barnett with Morningstar.
Mark Barnett – Morningstar
Good morning.
Jim Piro
Morning, Mark.
Mark Barnett – Morningstar
Sorry to continue on the RFP, but could you just remind me, I know you said Q1, 2013 for the kind of final submission to the OPUC. Is that a hoard deadline?
Jim Piro
Yeah. It really depends on the number of bids and the complexity of evaluating those bids.
We hope to get a shortlist determination in November of this year. Then that goes -- then we start -- and that goes into the commission for review to ensure that the independent evaluator agrees on the shortlist.
And then, depending on the complexity of each of the bids, we have to go in, into the negotiations to get final contracts. If our projects are at the top of the list in terms of the shortlist, then we can move forward on executing those projects.
If they’re not at the top of the shortlist and if they’re still on the shortlist, then we have to start the negotiation with the other parties to see if we can get to final contracts on those specific transactions. So -- and each bid is different and we’ve got like five different things we’re looking for.
We’re looking for an energy project. We’re looking for a flexible capacity project.
We’re looking for some seasonal capacity and then a winter-only capacity project. And those can be multiple bids or single bids.
So it really depends on the complexity of the projects and the bids and, kind of, which -- how the list shake out. So we hope to have it all wrapped up by the first quarter of next year, again depending on the complexity of the negotiations and the contracts that might take a little longer.
But we’ll have a lot more visibility in November when the shortlist is decided upon.
Mark Barnett – Morningstar
Okay. That’s helpful.
And then just one more quick question on the $5 million increase in revenues in the release that you mentioned is de-coupling and other items, how much of that was to de-coupling adjustment. And can you just maybe provide any detail on that other bucket?
Jim Piro
Sure, Maria do you want to do that?
Maria Pope
Sure. The de-coupling didn’t have a lot of impact.
And what happens with regards to other items is we have adjustments that come in during mid year as well as end of year, that are as a result of regulatory adjustments we make. In particular, we’ve had some around our historic SB 408 adjustments and other items.
Mark Barnett – Morningstar
Okay. That makes sense.
Thank you.
Operator
And we’ll take our next question from Sarah Akers with Wells Fargo.
Sarah Akers – Wells Fargo
Hi. Good morning.
Jim Piro
Good morning, Sarah.
Sarah Akers – Wells Fargo
The energy portion of the combined RFP, if the self-build option prevails. Would you expect to begin construction, kind of, as soon as possible and target that earlier part of that 2015 to 2017 timeline, or is it possible that construction begins in a couple of years with the 2017 targeted and service dates?
Jim Piro
Well, I think right now -- it’s going to be about a 3.5 year construction process. And so depending on when we get started -- we’d like to get started construction next year, and mobilizing things but it will take roughly 3.5 years to get that project built.
At least our proposal will take that long. So you can add that up to the dates and get to kind of the in-service dates.
So it’s going to take sometime. The capacity can be build much quicker, much shorter timeframe and we would hope to have that on line by 2015.
Sarah Akers – Wells Fargo
Got it. And then in terms of the rate strategy for recovery of the RFP projects if self-build does prevail, any chance you could do a single item rate case in organ to pick these up or will they require full general rate cases?
Jim Piro
Maria, do you want to take that?
Maria Pope
Sure. We can file a single item rate case.
I don’t think that it would probably be a good idea for us to do so. In that interveners and others could ask us any -- to address any issues that we wouldn’t have put forth in a rate case if we chose to do a single item, or limited item.
So we would probably do a general rate case at that point in time. Do you remember that for renewables in particular, we have a tracking mechanism.
And we don’t need to have a rate case to pull those projects into customer prices.
Jim Piro
And one thing we have done, Sarah, in the past is we filed a general rate case with a new resource in it. But because the resource doesn’t start in service on the date of the prices, say it starts in the first quarter, we have been able to at least get approval on the cost recovery.
And then when the plant goes into service, then we actually implement the price increase for that specific asset. So there are some ways to at least adjust it to the extent it doesn’t come in on January 1 of the calendar year.
And that’s when the prices might change. So might have a two-step increase, where prices would increase on January 1.
And then the actual asset recovery would start at the time when the plant gets declared in service.
Sarah Akers – Wells Fargo
Okay. So as long as it would be in that forward test year, you could pick it up when it comes online?
Jim Piro
Yeah. Typically that works as long as it’s within the first half of the year.
I think when it gets towards the end of the half of the year, then it gets -- a little more conversation has to happen.
Sarah Akers – Wells Fargo
Got it. Thank you.
Maria Pope
Thanks, Sarah.
Operator
(Operator Instructions) We’ll take our next question from Mike Bates with D.A. Davidson.
Mike Bates – D.A. Davidson
Hey, good morning guys.
Jim Piro
Good morning, Mike.
Mike Bates – D.A. Davidson
Most of my questions have been asked and answered already, but I did want to circle back on Cascade Crossing. Have you disclosed what proportion of that project you would like to own?
Jim Piro
Yeah. I think we have.
I think, in terms of megawatts we are looking at about 2,600 megawatts of the project. That’s the size that we think is doable for the configuration we are looking at.
And we are working with Bonneville to get agreement on that number. And how to integrate that project into the grid at the lowest cost lease risk way of dong that.
PacifiCorp has expressed an interest in about 1,600 megawatts of that 2,600 both by directional, and that’s their interest. Obviously, that’s critical -- its critical that Boardman to Hemingway get built for PacifiCorp to have that interest.
And so, we continue to have conversations with PacifiCorp on their interest as they look at that project as well as Boardman to Hemingway. Their desire is to get to the southern part of Oregon where they have load.
And this would allow them to get there at a very low cost way compared to other options they have looked at.
Mike Bates – D.A. Davidson
All right. Great.
Thank you.
Jim Piro
Thanks, Mike.
Operator
And with no further questions in the phone queue, I would like to turn the call back to Jim Piro, with any additional or closing remarks.
Jim Piro
Thank you. We appreciate your interest in Portland General Electric and invite you to join us when we report our third quarter 2012 results.
Thank you.
Operator
This does conclude today’s conference. We thank you for your participation.