Nov 8, 2012
Executives
Bill Valach - Director, Investor Relations Jim Piro - President & CEO Maria Pope - SVP & CFO
Analysts
Andrew Weisel - Macquarie Capital Neil Mehta - Goldman Sachs Lauren Duke - Deutsche Bank Brian Russo - Ladenburg Thalmann Sarah Akers - Wells Fargo Mike Bates - D.A. Davidson Mark Barnett - Morningstar
Operator
Please standby, we are about to begin. Good morning everyone.
And welcome to Portland General Electric Company’s Third Quarter 2012 Earnings Results Conference Call. Today is Thursday, November 08, 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, Brian, and good morning, everyone. I am pleased that you’re able to join us today.
Before we begin our discussion this morning, I would 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 access those slides on our website at portlandgeneral.com.
Now referring to slide number two, I would 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 requests that you read our most recent Form 10-K and Form 10-Qs.
The Form 10-Q for the third 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 third quarter earnings were released before the market opened today and the release is available at portlandgeneral.com. Referring to slide three, 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 our prepared remarks, we will then open the lines up for your questions.
And it’s my pleasure to turn the call over to Jim.
Jim Piro
Thanks Bill. Good morning, everyone, and thank you for joining us.
Welcome to Portland General Electric’s third quarter 2012 earnings call. As slide four shows, PGE’s third quarter net income was $38 million or $0.50 per share.
We are reaffirming our 2012 earnings guidance of $1.85 to $2 per share and will provide guidance for 2013 on next quarter’s call. 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.
Then Maria will provide a financial update detailing PGE’s third quarter results, liquidity and our outlook for the remainder of the year. Now let’s move to slide six for the economic outlook in our operating area.
Oregon continues to transition from a natural resource commodity manufacturing economy to one that is more diversified. Our operating area has seen continued growth in high tech, most clearly with Intel’s D1X fab, the largest in the world which Intel recently announced would double in size.
In addition, four data centers and a solar manufacturer have located here in the past two years. We have also seen significant growth in parts manufacturing and healthcare sector.
The State’s unemployment rates continues to decline, dropping to 8.7% in September from 9.5% a year ago. The unemployment rate in our operating area is averaging 7.6%, down from 8.3% last year.
We have continued to see customer growth of about 0.5% annually since 2009. Since this time last year, we have added 4,500 customers.
So far this year, our weather adjusted energy deliveries are up about 0.5% over 2011 weather adjusted levels, driven primarily by the industrial sector. We expect to maintain that 0.5% growth for the full-year.
Now on to slide seven for operational excellence. We continue to deliver excellent operating performance company-wide.
Our generating plant availability continues to be in the top quartile and has exceeded our expectations for the year. Our distribution, reliability metrics, which measure the frequency and duration of the customer outages are strong.
This performance is a key component that influences our customer satisfaction. We are the number one investor on utility in the nation for residential customer satisfaction and in the top [best of] for business customer satisfaction in JD Power & Associates 2012 Electric Utility Satisfaction Study.
We are also ranked second nationally for key customer satisfaction by TQS Research Incorporated. In addition, we are making good progress on our continuous improvement projects, aiming at transforming our operations to be more efficient and effective.
I am proud of our employee’s hard work and dedication to customer service, outstanding system reliability and cost efficiency and effectiveness efforts. Now lets please refer to slide eight for an update on our progress executing our IRP action plan.
For our capacity and energy RFP, PGE received 32 bids representing 15 projects. These include a mix of projects to be sold to PGE, projects that would sell power to us under long-term purchase agreement and PGE’s benchmark bids.
We are working with an independent evaluator selected by the Oregon Public Utility Commission to evaluate the bids. We expect to have our final shortlist of projects by the end of 2012 with final resource selection taking place in the first or second quarter of 2013.
Moving to slide nine, we are also making progress with our renewable RFP; we issued the RFP and submitted a benchmark proposal in October and all other bids are due next week. We expect to have a final shortlist by the end of the first quarter of 2013 with final resource selection occurring within the first half of next year.
Now turn to slide 10 for our Cascade Crossing Transmission Project update. We continue developing and providing information for the draft settled with Environmental Impact Statement and the Environmental Analysis for the Confederated Tribes of the Warm Springs.
We are also in the midst of negotiations with Bonneville Power on agreements that will enable the integration and operation of the project into the Northwest Power Grid with specific for regarding their potential participation in the project as a co-owner and with the Confederated Tribes of the Warm Springs on easements to cross tribal land. The project is in the planning and permitting stage and we expect to receive the necessary permit in 2014.
Subject to receiving all necessary approvals, we are targeting an in service date no earlier than 2017. Overall, we are making progress on the RFPs and Cascade Crossing that will deliver long-term value to our customers as well as contributing to potential growth for the company.
Now I would 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. Turning to slide 11, net income for the third quarter of 2012 was $38 million or $0.50 per share, compared with $27 million or $0.36 per share for the third quarter of 2011.
For the first nine months of the year, our net income was $113 million or $0.49 per share versus last year, when we earned the $118 million or $0.57 per share. Quarter-over-quarter, the increase in net income was driven by three main factors: A 2% in residential energy deliveries due to warmer weather and adjustment to the PCAM or Cost Power Cost Adjustment Mechanism.
A small investment gain on our non-qualified benefit plan trust assets compared with an investment loss in the third quarter of last year. Year-to-date earnings are lower than last year, due to a decrease in residential energy deliveries and less favorable high drought conditions.
On slide 12, total retail revenues for the quarter were $422 million, up $16 million from the third quarter of last year. Revenues related to the PCAM increased quarter-over-quarter as we recorded $4 million customer refund in the third quarter of 2011 and $7 million decrease to the 2011 customer refund this quarter.
Energy delivery revenues decreased quarter-over-quarter largely due to a 1% decrease in the average retail price of energy sold and an increase in the number of customers’ purchasing power from an energy service supplier rather than directly from PGE. In particular, we've seen some customers in the healthcare, grocery and retail sectors shift to energy service suppliers.
However, this is a neutral effect on gross margin as the loss revenue is offset by higher cost reduction and fixed generation charges. Total retail energy deliveries increased approximately 0.5% quarter-over-quarter, including a 2% increase in residential deliveries.
When energy deliveries are adjusted for weather and for certain industrial customers that minimally impact the margin, loads were down in the third quarter about 0.4% versus last year. This is driven by a decrease in commercial deliveries particularly in the government and education sectors.
Because of this decline, we've reduced our full year weather adjusted low forecast from 1% to 0.5%. This is in line with the 0.5% growth we've seen to the end of the third quarter of this year.
As you can see on slide 13, purchase power and fuel expense was flat quarter-over-quarter to $182 million. The average variable power cost increased by 1% while [total] system load decreased by about the same amount.
Decreases in hydro and wind generation drove the overall variable power cost increase. Generations from PGE-owned and mid-Columbia hydro projects exceeded our annual power cost update tariff forecast by about 14%.
However, this is lower than last year’s particularly favorable hydro conditions. Generation at our Biglow Canyon Wind Farm decreased quarter-over-quarter due to less favorable wind conditions.
Lower than expected wind generation also reduced our production tax credits which resulted in an increased effective tax rate for the quarter. For the full year, we expect our effective tax rate to be comparable to rates over the past few years which have ranged from 28% to 30%.
Net variable power costs were $4 million below the baseline for the third quarter, for the total of $14 million below the baseline for the first nine months of 2012. We estimate the power costs will be within the lower deadband in the PCAM for the full year.
So we do not expect to record a 2012 refund to the customers. Moving on to slide 14, production, distribution and administrative costs totaled $99 million in this quarter, down $6 million from the third quarter of last year.
Higher plant maintenance and pension costs were offset by lower distribution system and administrative expenses. Depreciation and amortization expense for the quarter was $63 million, up $4 million quarter-over-quarter.
This includes a $3 million decrease related to the deferral of costs associated with several capital projects. So far this year, we've deferred $11 million and expect to defer a total of $16 million for the year.
Capital expenditures this quarter were $81 million and totaled $218 million for the first nine months of 2012. We expect capital expenditures for the full year to be $328 million.
Please now turn to slide 15. We continue to maintain a solid financial position including investment grade credit ratings and strong liquidity.
As of September 30, we had $755 million in cash in available revolver capacity. In October, we redeemed 100 million first-mortgage bonds, bringing our equity to 51%, a little over our target of 50% debt and 50% equity.
Our need for additional long-term debt or equity will depend on the timing of Cascade Crossing and the outcome of the RFPs. As Jim noted, we're on track to be within a full-year earnings guidance range of $1.85 to $2 per share as shown on slide 16.
We have reduced our load forecast but we continue to benefit from favorable power supply operation and remain focused on improving the efficiency and effectiveness of our core utility operations. Jim?
Jim Piro
Thank you, Maria. Our performance during the third quarter reflects our continued focus on operational excellence.
Moving forward, we will continue to execute our business strategy and we will position the company for future investment opportunities that deliver value to our customers and to our shareholders. Operator, we now like to open the call for questions?
Operator
Thank you. (Operator Instructions) And we will take our first question from Andrew Weisel with Macquarie Capital.
Andrew Weisel - Macquarie Capital
Couple of questions, first on the timing of the RFP decisions and Cascade and service data, it looks like they were all pushed back or potentially pushed back a little bit, can you just walk us through a little bit about what drove you to those?
Jim Piro
Really, it’s just the timing to get through the process. We had a little bit of delay when the OPC granted about a 10 day extension and getting information from the bidders into the process to clarify certain information around gas supply for the various projects.
So that slowed us down a little bit. And then just there is the evaluation process we are going through.
So right now, we are working on putting the shortlist together. We hope to have a final shortlist by mid-December.
At that point, then we will start negotiating with that shortlist of bidders. All that is confidential and we can’t share that generally into the marketplace.
So and then ultimately we would like to get a final decision on the capacity and the energy resources either late Q1 or early Q2. It really just depends on the speed of the negotiations as we go through that.
On the renewable I think we are pretty much on schedule. We will get the bids next week and then we will go to that same process of putting the shortlist together and then start negotiating with that shortlist.
So it’s going a little bit slower but not materially slower than what we’ve initially laid out. Our Cascade Crossing is a little bit more delayed but we continue to work on the environmental [putting] process.
It is a complex process. We are putting all the information together and it’s just a nature of these projects as we go through them.
Andrew Weisel - Macquarie Capital
Okay, then sort of bigger picture when you think about reducing the forecast for load growth, we talked in the last call a little bit about the longer-term trends coming down as well, how do you gauge the risk that in service dates for the generation projects or the transmission might get pushed back say another year or two?
Jim Piro
As it related to load forecast?
Andrew Weisel - Macquarie Capital
Well, I understand the short falling of your capacity but all things is equal as the demand is slower than expected might that affect in service dates?
Jim Piro
No, not really, because we are short utility. We do not have enough existing generation to meet our retail load.
And so the resources that we are proposing to add are just to fill in that open position that we currently are buying in the marketplace. So that really the timing of loads really does has little impact on the need for those resources.
We still need them irrespective of the speed of the load growth.
Andrew Weisel - Macquarie Capital
Okay, very good and then lastly, just if you clarify a little bit on pension, there were some comments about some year-over-year impact from the benefit plan, if you could quantify that as then as we approach year end may be early thoughts on somewhat the 2013 pension effect might look like?
Jim Piro
Maria, you want to comment on that one.
Maria Pope
Sure, we have had an increase in our pension expense from 2011 to 2012. And we have offset the vast majority of that with reductions in other areas and we expect to do that as well in ’13.
What we have reflected in customer prices is about $5.1 million and that was roughly what our pension expense was in ’11. In ’12, its $13.6 million and in ‘13, we are expecting it to go up roughly about another $10 million although we have not finished the estimates for that.
Most of that change is due to the lower discount rates.
Operator
And we will take our next question from Neil Mehta with Goldman Sachs.
Neil Mehta - Goldman Sachs
So how are you thinking about the timing of your general rate case here? And how do recent ROE outcomes in the states impact your rating?
Jim Piro
So we are just, we just finished our 2013 budget and we are looking at the 2014 budget. Right now, we are planning to file a 2014 rate case; we probably plan to file that in February.
We still haven't made a final decision on that but we are going through all the steps to look at the numbers. Obviously, we have to consider what's going on across the country in terms of ROEs.
You've seen overall throughout the country a trend downwards but that's something we take into account as we make decisions on filing the case. We have a couple of projects that come online in 2014 that we really need to address, one is the Boardman dry sorbent injection project that we need to implement to meet our requirements under the new (inaudible) rules and our step agreement with the states.
So that's a pretty important project. We also have a couple of small capital projects that are coming into service.
So those are all factoring into our decisions as well as what Maria talked about in terms of the pension, that's another issue we are going to have to address. So we are making plans right now.
We haven't made the final decision yet but we are just going through the numbers but kind of stepping through the process. We would likely file as we make the decision in February.
In Oregon, it’s about a 10 months process to get through that overall process. So rates would be effective January of 2014.
Neil Mehta - Goldman Sachs
And at this point, the decision in terms of a pure utility in terms of for their ROE, I think we will get one more before you ultimately make the decision on whether to pull the trigger?
Jim Piro
Yeah, that's part of it. We look across the nation too and see what the interest rates are doing, that all goes into our evaluation on when we file a case or not, Maria do you have anything else to add?
Maria Pope
No, and I would also note that in addition what Northwest Natural’s, I think you are referring to, there have been other utilities that have filed in Oregon in terms of Idaho (inaudible) and Pacific is currently working towards the settlement on their current rate case.
Operator
And we will take our next question from Lauren Duke with Deutsche Bank.
Lauren Duke - Deutsche Bank
It looks like you are expecting ongoing CapEx to be up about $50 million in 2013 and 2014 versus your disclosures from last quarter. Can you just explain what that relates to and if that's also coming into play in your rate case timing decisions.
Maria Pope
Sure, our capital expenditures for 2012 are pretty much unchanged. As we look at 2013 they are up a little bit but not significantly, and these capital expenditures are not driving any decision with regard to the rate case.
When we look at the larger rate case driven capital expenditures, those would be the RFP project and Cascade Crossing that Jim talked about earlier.
Jim Piro
And those probably wouldn't affect us in 2014. It still is a capacity resource which would come online in 2015.
And so that would again that would go into maybe a 2015 rate case. So as far as 2014 or more of the smaller projects that we've been growing as well as the ongoing capital to reinforce the system.
Lauren Duke - Deutsche Bank
And then secondly do you plan to disclose what your renewable benchmark project is, and if not, what's your thinking behind that, when you disclose the capacity and energy RFPs project.
Jim Piro
At this time we don't have any plan to disclose the name of our renewable benchmark project. PGE's acquisition project is subject to an agreement with the third party which is covered under the confidentiality agreement.
So we currently don't have any plans to disclose the name of the project unless we are selected as the winning bidder.
Operator
And we will take our next question from Brian Russo with Ladenburg Thalmann.
Brian Russo - Ladenburg Thalmann
The $100 million of first mortgage bonds that were redeemed, essentially that was debt reduction, that wasn’t refinanced with other debt correct?
Maria Pope
No, we use our excess cash exactly.
Brian Russo - Ladenburg Thalmann
Okay, so, when we're looking to ‘13 over ‘12 total debt should be down roughly a 100 million?
Maria Pope
Yes, we also have some maturities that are taking place in ‘13 as well, and we currently continue to have excess cash, although not nearly as high as it was at the end of third quarter at 156 million. And a lot of that again will depend on the timing of the capital expenditures.
Brian Russo - Ladenburg Thalmann
Just if you can convey what level of confidence you have in earnings at the 9% kind of utility benchmark ROE in ‘13 given the lower revised load forecast?
Maria Pope
If you look at our load forecast for 2012, the main areas are really the commercial sectors which tends to move around a bit. As Jim described in his opening comments, we're continuing to see very strong industrial growth which is really where we have forecast the vast majority of our long-term growth to come from, and in particular, Intel is expanding and that also has implications to other customers of our in addition to Intel, who were significant suppliers to them.
We're also seeing a number of datacenters come in to the area and have made announcements for future growth as well as coming online right now, and we've actually even seen a new solar customer enter the market and take their production up quite significantly. So we see this as a blip for this year, but we don’t see it changing our long-term trends, our ability to earn our target of about 9%, which is we have talked about before is about 1% off of where we see our regulated ROE of 10% which is our current rate.
Brian Russo - Ladenburg Thalmann
Okay, so we might expect growth to lower growth to accelerate in ‘13 over the 12 level of 0.5%?
Maria Pope
Sure, that would certainly be our expectation, as we disclosed in our prior documents, we estimated over 1% load growth on a pre-continual basis and much of that is coming from the industrial sector.
Operator
And we will take our next question from Sarah Akers with Wells Fargo.
Sarah Akers - Wells Fargo
Appreciate the comments on the pension expense. I was wondering if you could comment on the O&M trend or goal for 2013 I thought for 2012 it was to keep it flat is that the case again in ‘13?
Maria Pope
Sure, what we have done is we have taken a look at our overall O&M spending, and as we have noted we do have a number of inflationary things happening to us in terms of rising commodity prices, healthcare costs, salary increases and others and we have really worked hard to offset those natural costs inflation factors with cost reduction activities and being more efficient. As we have mentioned in the past, we have benchmarked almost every major area of the company and has significant plans in place to reduce our costs.
We have implemented a number of new systems and new financial system and new supply chain systems aimed at reducing our purchasing costs and just this past Monday we went live with new inventory and work management systems. None of these changes [assuming] on the operations is easy and takes a lot of work.
So it’s really a project or series of project that we are implementing over the long term. Offsetting that is potential discussion which is in the numbers that we’ve already talked about.
So we continue to focus on this area but I wouldn’t place too much emphasis on our numbers in any one quarter and really look to our longer term trends guidance on the last state of the slide back of the $105 million to $110 million.
Operator
(Operator Instructions) and we will take our next question from Mike Bates with D.A. Davidson.
Mike Bates - D.A. Davidson
I have a couple of questions. Just on the visibility is to why and when the asset in the region has been performing below expectations?
Jim Piro
We have been doing lot of work on this topic, just because we are learning more about the wind regime and the (inaudible) and so we have done new studies and we are trying to evaluate those studies in the context that what we are seen and overall, this is up against fairly new industry just like hydro there is variability and if we are seeing some down years even though this years is probably one of our higher years, but still little bit below our expectations. So we continue to work with (inaudible) who is the expert in this area to really to understand wind regime and the gorge.
Again we are on to this maybe five years and learning more and more about the win regimes and even know the pattern is been down, we are not sure this is the trends for sure, but we are trying to evaluate the best we can and they are helping us study and learn the impacts of the various winds [PCAM] have on each other as well as just the overall wind regime and gorge. This will be probably our topic in our next rate case as we go through it and talk to the commission about how do we adjust for the uncertainty of wind and deal with the variability that we've seen over the last few years.
Mike Bates - D.A. Davidson
And in your (inaudible) you disclosed that power costs are expected to be about $22 million lower in 2013 versus 2012 if I read it correctly, and does that assume that [Biglow] assets performed at a level in line with historical expectations or if those expectations been revised downwards reflect …
Jim Piro
In the annual update tariff we use the capacity factors from the previous rate case, and those represent not necessarily the historic average but represent the studies that were performed at the time we decided to move forward with those projects. So they do not necessarily reflect any kind of average of the historic results we've seen.
So that's the assumption in there. The only way you can adjust those capacity factors is as we see think going into a general rate case and changing that mechanism on how their forecast is for each annual update tariff.
That $22 million does not include any of the recent experiences we've seen at the wind farms.
Maria Pope
And Michael just for perspective in both 2011 and 2012, we are looking at about $0.03 to $0.04 a share impact.
Operator
And we will take our next question with Mark Barnett with Morningstar.
Mark Barnett - Morningstar
I know you've already kind of addressed this a little bit with their renewable projects. But you had mentioned on last quarter’s earnings call that you wouldn't disclose particular names of projects for competing RFP bids, but that you might provide some general statistics I am wondering if we are going to see that anytime sooner or if you could give us some detail today.
Jim Piro
The process right now is we won't get all the bids until next week. I think the day is November 13 due.
So we typically once we get all those in and assess them as we did with energy and capacity, we send out a general term report on how many bids we received and generally a number of them and just some general characteristics. We can't disclose the names of the bidders.
That's all confidential but we can provide some general characteristics and just some broad information on the bids and how many megawatts, how many bids, how many different kinds of bidders, some of that general information like we did with the energy and I would expect we would do that just because of the interest. My sense is there will be a very competitive bidding process.
We seem to be the only one out there acquiring new renewable resources as we look at the other utilities around the region. So we expect a lot of the interest in that RFPs.
Mark Barnett - Morningstar
And just a minor thing, you talked a little bit about pension expense, but when we look at your run rate for overall operating expense for 2012 when we look into 2013 is it a little too early to provide any guidance around that or where might you stand.
Maria Pope
Yeah, our pension is the area that is going the most between ’12 and ’13 and we will provide a better guidance on full O&M expenses on our next call as well as guidance for the year.
Operator
(Operator Instructions) and we will take our next question from (inaudible).
Unidentified Analyst
My questions have been answered.
Bill Valach
Okay, looks like we don't have any other calls. We appreciate your interest in Portland General Electric and invite you to join us when we report our fourth quarter 2012 results.