Q3 2020 Portland General Electric Co Earnings Call
Today October through the 2020.
The call is being recorded and will touch all lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer period. If you would like to ask a question. During this time of the press Star then the number one on your telephone keypad. If you would like to withdraw your question press the pound key on your telephone keypad.
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For opening remarks, I will turn the conference call over to Portland General Electric's Senior Director of Investor Relations chart on Howard Weil. Please go ahead Sir.
Thank you Jamie good morning, everyone I'm pleased that 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 will be referencing throughout the call. The slides are available on our website at investors not Portland General Dotcom, referring.
Referring to slide two 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.
This release and our most recent periodic reports on forms 10-K, and 10-Q, which are available on our website.
Leading our discussion today, our 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.
Thanks, John and thank you all for joining US today I hope that you and your families are staying safe and healthy during what continues to be a very challenging time.
Portland General and all of US here have been put to the test several times this quarter.
Our team has tackled difficult issues head on and took swift actions.
I'd like to discuss each of these two events.
First at the end of August, we announced that energy trading activity in certain wholesale electricity markets would result in significant losses upon.
Upon learning of the issue our board of Directors immediately formed a special committee to review the energy trading situation.
This review is ongoing.
At the time.
Our team worked quickly and in early September we announced that we no longer had net market exposure.
I want to make two things clear.
This effect of trading losses, it was isolated to the third quarter and the trading losses had no impact on our operations.
Second we experienced one of the most destructive wildfires seasons on record.
In responding to the wildfires the entire organization demonstrated resilience and unwavering focus on customer safety.
At the onset of the historic Windstorm and high risk wildfire conditions, we work in partnership with local authorities and emergency responders to proactively shut off power in several high risk areas.
During the course of the week, we not only enacted public safety power shut off but we also restored power to about 250000 customers.
Over the last several years, our investments in new resources.
Vegetation management as well as inspection and maintenance of our equipment enabled us to act swiftly, which helps emergency responders safely fight the wildfires.
We continue to invest in improving our systems, including steel Poles substation upgrades distribution automation and other equipment.
These and other initiatives to build on our strong operating show Foundation.
With growing demand in the Pacific Northwest these needs are more important now than ever.
Our vision.
For a clean energy future.
Drive our strategy.
There is a clear need for urgency in addressing climate change and to meet our customers desire to be served with increasingly clean renewable energy.
We are building on our 11 year track record of having the largest renewable energy program in the United States.
With over 25% of customers buying 100% Green energy.
Today, we have a number of projects and initiatives underway.
Our agreement with Abbott growth to source power from the largest solar facility in Oregon will serve an equivalent of 40000 homes.
We're furthering our investment in battery storage testing several projects across our service territory.
Between the wheat ridge wind solar and battery storage projects and these other investments we have a lot of important work underway throughout our state.
With year to date earnings of $1.15 were on track to finished at the upper end of our guidance range of $1.40 to $1.60 per share.
Our underlying operations remained strong.
And we continue to find efficiencies and reduce costs throughout our organization.
Finally, I want to recognize the hard work of our co workers and first responders, who in the middle of a pandemic once above and beyond to protect our community.
Before I turn the call over to Jim I would like to take a moment to thank him.
As I'm sure. Many of you have seen yesterday afternoon, we announced that after a long and successful career at PGT, Tim plans to retire at the end of the year.
I can't overstate, what Jim has done for PE throughout his 36 year career at the company.
He active lives our company values and his dedication and leadership has been instrumental in driving financial improvements and strategic initiatives.
Jim is well recognized as a leader across the west and played an important role alongside other utility leaders in creating the western wholesale financial power markets.
On a personal note his camaraderie and counsel have meant the world to me and the officer team.
In connection with Jim's retirement, Jim Angello, the former executive Vice President and CFO Hawaiian Electric industries has been appointed senior advisor effective November Thirtyth.
He will step into the CFO role on January Onest.
We are excited to have Jim onboard.
We also announced that Brett Sims, our senior director of strategy commercial and regulatory affairs has been appointed Vice President of strategy planning and energy supply effective today.
A top priority for Jim and me as well as the entire management team is to ensure a smooth transition.
Finally, I want to add that we're pleased to welcome Michael Lewis and Jim Torgerson to our board of directors, both Michael and Jim bring valuable skills and extensive utility experience that will support our efforts to ensure a clean energy future for our guidance and now let me turn it over to Jim.
Thank you. Thank you Maria Thank you for those comments and good morning, everyone.
Before we discuss our financial results I would like to recognize the resiliency and focus the company has maintained throughout this quarter's challenges ensuring that we deliver on our commitments and continued to invest in safe clean reliable and affordable energy for our customers.
Turning to slide six I'll walk through our quarter over quarter results.
As Maria mentioned earlier, our earnings this quarter were impacted by the losses associated with our energy trading activity. So.
Despite this impact our core operational results were strong and there were several items to highlight.
For the walk all start was 61 cents for the third quarter of 2019 excuse.
Excluding the impact of the energy trading loss on our purchase power and fuel expense gross margin decreased by nine cents. This includes a two cents increase in total revenues retail deliveries increased 4% compared to the third quarter of 2019 as deliveries to both.
Residential and industrial customers showed considerable growth.
Over the prior year.
The impacts with increased residential usage are largely offset by the decoupling mechanism come.
Commercial deliveries, which declined exceeded 32% on collections this quarter.
2021, our decoupling mechanism will reset again.
This increase in revenue was offset by an 11 cents decrease attributable to higher power costs, partially driven by an increase in the average price for purchase power.
Second there is an 11% increase for lower plant in transmission and distribution operating expense, which was primarily driven by reductions in outside services increased capital work relative to own them and reduced maintenance at our generation facilities.
Third a 12 cents increase were reduced administrative and general expenses, which includes a 6% increase from expenses that did not reoccur primarily associated with the stabilization of our billing system in 2019.
The 6% increase from lower administrative expenses due to reduced incentives in health insurance premiums.
A four cents increase due to the efficiencies at Boardman as we finalized the operations leading up to the coal fired plant shutdown in October now.
Next a four cents increase in other income from AFDC equity associated with ongoing construction of our integrated operations Center and wheat ridge facilities and an increase in nonqualified, none of the trust from investment returns.
There was a five cents increase lower tax expense, primarily driven by lower pre tax book income following revisions to our forecast after the impact of the energy trading losses.
Finally, there was a two cents increase from lower miscellaneous expense.
Energy trading losses represented a negative impact of a $1.90 per diluted share.
This amount represents $127 million impact from the energy trading losses net of $30 billion tax impact in the quarter.
This brings our GAAP net income to a loss of 19 cents per diluted share after adjusting for the impact of the trading losses non-GAAP earnings per diluted share was 90 cents.
Onto a regulatory update last week, the Oregon Public utility Commission approved two of our outstanding Deferrals first the commission approved our application for deferral of certain incremental costs related to COVID-19.
The final stipulation among parties related to the deferral has been filed with the commission. This.
The stipulation includes dates from reduced for restarting disconnects late fees and extended time payment agreements.
Second the commission approved the deferral for incremental OEM and capital expenses related to the September wildfire event.
We are continuing to assess the damage to our system and expect additional OEM and capital costs related to the wildfires to be assessed were to be addressed by the deferral.
Also we received an order approving our renewable adjustment clause for the wheat Ridge energy facility.
The commission found that we acted prudently and our decision to select the facility in consultation with the independent evaluator.
The project is scheduled to go into service by end of this year.
Regarding our future resource needs, we plan to issue one or more RFP for new non emitting resources in the first half of next year and plan to file an Iraqi update before the end of 2020.
On to slide seven our balance sheet remains strong and has the capacity necessary to continue to invest to serve our customers.
As of September Thirtyth 2020, we had $918 million available short term credit letter of credit capacity and cash and $688 million, a first mortgage bond issuance capacity.
We plan to further strengthen our liquidity position by issuing up to $230 million of long term debt Securities. Later this quarter with net proceeds being used for general corporate purposes, and repayment of short term debt borrowings.
We expect to fund the remainder of the 2020 capital requirements with cash from operations and the issuance of commercial paper as needed.
Moving on to slide eight which shows our updated capital forecast, we added $100 million to our capital forecast for investments that prioritize the reliability and resiliency of our system, while minimizing customer prices.
Recent weeks that demonstrated the importance of maintaining a safe and reliable grid as our system continued to perform despite facing the challenges of high wind and wildfire events.
As Maria mentioned, we are reaffirming our full year 2020 guidance of $1.40 to $1.60 per share for 2020, we are expecting to finish in the top half of our earnings guidance.
We are also reaffirming our long term EPS growth of 4% to 6% and establishing 2019 as the base year for this guidance.
This growth is supported by our continued focus on long term benefits for our customers of Decarbonizing, our power supply electrifying, the economy and delivering strong operational results to ensure safe clean and affordable energy.
And now operator, we are ready for questions.
Yes.
Thank you as a reminder to ask a question you all need to press Star then one on your Touchtone telephone to withdraw your question from the queue. Please press the pound key.
Please stand by what we can politics una roster.
Our first question comes from into Kim with Goldman Sachs. Your line is now open.
Good morning, Thank you.
Morning, Jeff.
And congrats and best of luck in the next phase three.
Thank you.
First question is on time.
Timing of rate case, given the cobot and the wild bottle fire deferral helps to stabilize the earnings trajectory somewhat what are your latest thoughts on potential timing of the next general rate case and in a scenario, where you file or do not file. The next year. So do you anticipate any need for equity.
Insoo, we always evaluate on an annual basis, whether there's a need for a general rate case on a farm forward basis.
And we're continuing to do that evaluation as you know we are making significant investments in our system on behalf of customers and we will have those deferrals out there but.
We will most likely if there is any news to be shared regarding a general rate case, you'll probably hear that in our fourth quarter call.
And and so we have no need for any equity financing.
Understood.
And that's a little more specific gym, but on the just for the balance of the year based on the guidance to be at the upper half that implies for Q to be meaningfully lower just on a year over year basis or.
Based on what you've been earning and previous few years in the fourth quarter of.
Sides.
Essentially demand for co bid or net variable power costs differences, what else is driving some of that.
Well you got to keep in mind, while revenues are doing well.
When you get to the fourth quarter as we kind of pointed out in our comments you've got several drivers that are going on one is the decoupling mechanism is really kicked in in full force weve have a 2% GAAP.
On the amount of collections that we can do from customers and you look at the residential side, it's basically being decoupled away and on the commercial side, we've hit that cap and now we're absorbing the continued decrease in commercial loads or.
The other thing is is that on the power cost size. We've always pointed out we were way down below the baseline in prior quarters and now we're moving up into the dead bands and that really is being driven by flows of energy in the market given the fact that there has been.
Some transmission thats been taken out of the marketplace and construe caused some constraints along with hydro and then we moved the outage associated with the decreased struck facility from earlier in the year into the fourth quarter. So you've got that and then the other items are or a bunch of miscellaneous one.
Associated with things like that the Covance deferral because of the fact that we cannot do disconnects until we get let's see for commercial till the first of December and then in April of next year, when we get to residential.
We can't charge late fees and late fees have always been part of our revenue.
Although for prior quarters that we have out there.
And then as I mentioned, there is a bunch of miscellaneous stuff, obviously, we're incurring some additional cost associated with.
The business review by the Special Committee and in defending ourselves in the upcoming.
Losses that were anticipating regarding the trading that was going on.
Got it thank you for that detail and just one more if I could on Maria it seems like based on the third quarter year over year commercial load declines is definitely a more muted than what we saw in the second quarter can you describe a little bit what you're seeing on the ground on the small commercial side.
In your neighborhood.
Great. Thank you.
So with regard to commercial it did decline much more rapidly in the beginning of the pandemic and we have seen less decline of late I think it's too early to call clearly theres a rise in cases across the country and Oregon is no different.
What we are really pleased with is to see the continued increase in industrial customers last.
Last quarter as we talked about industrial growth can be lumpy. We had good growth in the second quarter in that industrial growth continued to be very strong in the third quarter up about 9% on a weather adjusted basis. So overall, we continue to be very optimistic about the growth in our service territory.
Both as a result of in migration, which drives residential and somewhat commercial.
But more importantly around industrial Hi Tech data centers.
And many of the additional customers that were seeing come into the area.
Got it thank you both.
Thank you thanks into.
Thank you. Our next question comes from Julien Dumoulin Smith with Bank of America. Your line is now open.
Morning.
Hey, good morning, Thanks for the time and best of luck here. Thanks.
Thank you Julian to the blood absolutely it's been a pleasure.
I wanted to come back to his board review process, if we could talk which is a little bit more on the timeframe.
On that and perhaps even more importantly can you talk about your senses.
Any potential process.
Oregon, QC and where that May stand now specifically as it relates to trading loss.
But frankly more broadly if there is anything on the wildfire front, we should be watching too.
Sure. So thank you Julien.
And as I noted the special committees review is ongoing I will make sure that it thorough and then we get to the bottom of all that took place and we'll make sure that we are transparent to us as we learn more so I don't have anything more with regard to timing on that.
I would imagine that the PC and debt chair Decker, we'll take the appropriate actions to ensure confidence and customer pricing and our risk management philosophies.
I would say with regard to wildfire.
Recovery with regards to covert recovery with regards to overall proceedings at the PVC.
There is a number of dockets, it's very active and we continue to work constructively with all parties.
And were very pleased that the commission acted so swiftly when it came to wildfires that was greatly appreciated. There is no question about it it was an unprecedented event.
And yeah. We are we are fortunate to have taken Swift action.
To have prevented any.
Any we know of no none of our equipment that contributed to any of the wildfires.
Yes, yes.
For Q.
A quick clarification here if I can just a couple of details in Portland.
Slide 2019, Thats actual or is it something else and then separately, what's the thought process on the balance of the previous reduction in the Capex. Just is there prospect can bring that back or.
Just curious the 100 versus 180.
So let me, let Jim address to you the details around exactly our base for our forecast, but please know that we heard you and another investors.
Wanting more granular detail with regard to our 4% to 6% long term growth rates.
And as when we look at our capital. We are we are very attuned to the impacting customer prices.
But we also recognize that we are lucky to have significant customer growth in our area and new capital needs to support that customer growth.
And then in addition investments.
In infrastructure this aging wildfire resiliency.
And others so.
As.
Projects come up as we continue to the plan there may be additional amounts but at this point in time, if it's too early to call. We are very focused on ensuring.
Customer prices remain low and affordable across our area. So Jim you want to talk a little bit more about the baseline yes. Julian me 2019, we chose that because that was the last general rate case that we have been through and so that provides a cleaner look when you're trying to.
Forecast on a on a forward basis and as Maria pointed out at the capital we've got a lot of growth going on in the service territory with additional minimum load agreements being signed by customers increases in the digital space and just overall in my.
Gration I mean, we have a shortage of housing in the state of Oregon and that is keeping a lot of people busy as.
Homes are being bid up very very quickly so.
Great amount of demand here and Thats really showing up in our in our numbers.
Got it excellent all right I'll leave it there. Thank you all very much.
Thanks Julien.
Joe.
Thank you. Our next question comes from Sophie Karp with Keybanc. Your line is now open.
Hi, good morning, Thanks for taking my question.
Okay.
Good morning, good morning.
Oh, okay.
You could give us a little bit more color on.
The magnitude of the wildfire classical will be deferring once the recovery mechanisms are in Largo get blanket for local GRC.
All color on that.
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Yes, and then when it comes to the wildfires were about.
$10 million in cost right now.
Yes. The mechanism is a 12 month period, that's a deferral runs we are currently trying to us.
The additional damage to some of our transmission lines that are out in the rural areas and so we don't have cost estimates associated with those at this particular point in time.
So there is more to be figured out so there's more capital that we're anticipating that we're going to have to spend to recover some of this infrastructure and will know those numbers when when we get done with those assessments.
I had a little bit more on that do you think your winter folded into lunch here they are.
More likely to be a separate proceeding.
In addition to be separate the fact that it is a deferral at this particular point in time the period of recovery hasn't been determined as of yet.
Okay Thats great. Thanks, so much.
Thank you.
Thank you. Our next question comes from Anthony Crowdell with Mizuho. Your line is now open.
Hey, good morning.
Good morning, James Congratulations best of luck in the next phase great career with 36 years importantly.
Thank you it's been a long haul [laughter] [laughter].
I apologies for just looking to get more in the weeds on the guidance but.
Just to follow up on Juliens question earlier.
The base is 2019.
The higher earnings in 2018 at 239, and the thought is that every year post 2019.
I want to be between 4% to 6% growth, it's not something that some will be outcome or be above it each year will fall within that range.
Correct.
Great and then and then if I could transition to Olin.
This quarter I think.
I lost looks like it was on the waterfall chart there.
Service.
20 up in a sense you guys took for not only distribution and transmission I want them savings also some DNA savings is that something getting baking more sustainable going forward.
Sure. So as Jim mentioned, there were a number of issues that took place in the quarter that were favorable and some issues that were just reflective of of significant moves like our colstrip outage. So while we have made significant productivity and performance improvements across our operations.
We had a particularly good quarter.
This year and you're going to need to sort of look a little bit more long term as the improvements.
Relate to investments in capital they were late two cents in technology and those don't necessarily it's just all happen all at once but they take a while to really become embedded in our operations. So I would we are grateful for the great SEC third quarter.
In EMEA experienced but muted as we move forward and really focus on continuing to improve our operating performance and productivity.
Great and then just lastly on the trading loss just to.
Thinking about.
What anything that you could talk about that as maybe change I, who trading report to preserve a quarter now or any type of.
Safe cars that are in place now versus what was there before and I know Theres, a report coming out or as independent review.
Review and I'm, just curious what you could tell us that.
Sure. So first of all as I noted and we've been very clear on we move very swiftly.
To consolidate and isolate.
The events associated with the trading losses and.
Their impact is just to the third quarter, we have made a number of reporting changes and taken other actions first and foremost as I mentioned in my.
Remarks, with regards to Jim's career, he has extensive knowledge across the western power markets and our power operations currently reports to him.
Risk management in the company reports to myself and we have brought in an outside expert to help US. We've also beefed up other staffing and are taking this very seriously to ensure that it never happens again, we look forward to the report being finalized I promise you know more.
Tim and I as much of our board of directors.
And we will be transparent with our findings Tim anything else you want to add so just to clarify that these management changes where power operations reports to me is something that happened post the event yes.
Okay, Great and lastly, just well that report issued joint.
So investors or is that just something else being Charles what aboard.
You I don't know how the board will handle that this it's up to them and their decision, making but please know that they will are proceeding through a thorough process.
Great Maria James Thanks for taking my questions. Thank you.
Okay.
Thank you. Our next question comes from Brian Russo with Sidoti. Your line is now open.
Good morning, Brian Hi, Good morning, Hey, just to follow up on the Capex question the $100 million.
Incremental capex that you're laying in 2021 are you essentially just adding back what was.
Reduced in April.
And how does that kind of play into maybe.
And improving economic outlook in your service territory from April.
Brian you've got a spot on those our hand in hand, we're continuing to see growth in the service territory as I mentioned earlier, we've got strong residential growth that's going on strong housing market in migration and then a lot of growth in the digital space and then we we continue to do and.
Just in the resiliency and aging infrastructure that we have in the system and then what isn't there is there is no amounts associated with any renewable resources that we plan on adding to the system.
If they were to come out of the RFP process and then we've still got it.
Yeah.
Investments in the restoration of the system associates the wildfires so.
We will as we've always done we will evaluate on a quarterly basis, we have a gating process that I've mentioned previously.
We're making sure that every project goes through diligence phase before it gets moved forward to be included in our FCC capital expenditure updates.
Okay got it thanks, and then just on the fourth quarter.
Year over year it looks.
Looks like headwind in power.
Supply costs actually hit 42 as of September you were 27 million.
Below the baseline and the comments is that you'll be within the Deadband range. So.
The 27 million below well go to at least 15 million below but above zero, but still below zero is that the way to look at it.
Yes, and one thing I want to notices that we closed Oregon's only coal fired generation facility a number of days ago. So that Boardman plant has ceased its operations and Weve also seen higher gas prices.
Throughout the Pacific Northwest as a result of pipeline issues in Canada and elsewhere.
And we're watching the hydro and specification issues pretty closely Jim anything else you want to add Brian.
Brian I think you've got the math right, we on a year to date basis $27 million below and then we will be up.
We are the base somewhere in the the color by year end.
Right got it so your guidance for 2020 includes anywhere between zero and $50 million of supply power supply cost benefits for for the year.
Yes, Thats correct.
Okay, and then just one more clarification.
Did you did you guys to for 6 million of bad debt expense in the third quarter. So that 6 million did not hit the expense line is that the way to look at it or is that still pending to be deferred.
Well in our general rate case that we generally assume about $6 million worth of bad debt, we had talked previously about.
Bad debt expense that we would be incurring and we are now deferring and.
The amount associated with our deferral right now is probably around $8 million range.
Okay, but in.
In the third quarter reported results you were still expensing the bad debt expense correct.
Yes, yes got it okay. Thank you very much and good luck Jim.
Okay. Thank you Brian.
Yes.
Thank you and our next question comes from Travis Miller with Morningstar. Your line is now open.
Good morning, Thank you for taking my questions and again I'll Echo Jim Congratulations.
Best of luck.
Thank you Travis.
One of the little bit more on the trading losses.
And I'm thinking.
How should we think about putting that number in perspective relative to your purchase power cost another other fuel costs.
Is this something that would be.
Put in perspective over a quarter or over a year.
Over a couple of years, how should we think about that.
That $127 million in terms and then that would be after tax rate.
Relative to the 292 purchase power costs.
During the quarter 554 over the nine months.
Can you give me a sense of that.
Thank you Travis and Oh event is isolated does not relate to our ongoing power operations.
The number of $127 million as a pre tax number.
And the.
EPS impact to the third quarter is a dollar nine.
Just know that those positions were all closed and added.
In that quarter. So there will be no carryover to the fourth quarter from a market exposure.
Okay and.
With these when the second.
Good fun to the quarter, where these costs and trading losses that happened.
During the quarter or they were just booked in the quarter from a from past over a series of quarters trying to try to think about this in terms of yeah.
And our overall, we're just power cost yes.
Yes, they were realized 100% in the third quarter.
Okay, so thinking about the number be relative to that 292.
Okay booked purchase power costs.
Is that fair.
Yes, that's how I would look at it.
Okay. Okay, and then you mentioned potential legal action do you have.
Legal recourse to.
Anything related to.
Those trading losses, any chance of recovering not from customers. The recovering through legal means I knew that we we were very clear that we're not recovering these costs from customers in our 10-Q. We note that we have received a couple of lawsuits.
And have disclose those.
Okay and.
But those are lawsuits against you guys are your filing lawsuits against the people know older lawsuits against us.
Okay do you have any legal recourse against the people who were doing the trading losses, who makes it pretty well so.
The investigation is ongoing.
Okay. Okay.
Very good and then any chance in discussions with the PSC about.
Putting in some kind of wildfire mitigation plan link.
So your neighbors to the south of stuff like that any thoughts on doing capital through designated program going.
Going forward.
Sure. So on the Oregon Public utility Commission has been leaning into the risks around wildfire.
For some time one of the commissioners as a leader.
Leader across the West end convening forums with regards to not equipment.
Insurance.
Power safety shut off really bringing together the best minds across the west and and even there is collaboration with Australia and others as we figure out what the right thing to do is we have taken a number of actions over the last couple of years to ensure that will grow prepared we've invested adequately in equipment and that way.
It will continue and will continue to work collaboratively with all stakeholders, including the commission.
Okay.
Would you be interested in putting together some kind of multi year plan.
Capital, Yes, I mean, we do as you can imagine in running utility most of the things that we do are multi year in nature.
And pretty extensive as we have infrastructure throughout our service territory.
Okay, great. Thank you very much.
Thanks Ross.
Thank you and I'm showing no further questions in the queue. At this time I would like to turn the call back to Maria FFO for any closing remarks.
Thank you very much for joining us today, we look forward to continuing the conversation with those of you who will participate in E. Virtual meetings and then we also look forward to talking with you in February as we close out the fourth quarter. Thank you very much and thank you Jim and.
Congratulations thank you.
Ladies and gentlemen, thank you ever decision on todays conference. This does conclude your program and you may now disconnect.
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