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Good morning, everyone and welcome to Portland General Electric Company's Second Quarter 2019 Earnings Results Conference Call. Today is Friday, August 2, 2019. This call is being recorded and as such all lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer period. [Operator Instructions] For opening remarks, I will turn the conference over to Portland General Electric Director of Investor Relations and Treasury, Chris Liddle. Please go ahead.
Thanks, Michelle. 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 we'll be referencing throughout the call. The slides are available on our website at investors.portlandgeneral.com. Referring to Slide 2, I'd like to remind everyone that some of our remarks this morning will constitute forward-looking statements. We caution you that such statements involve inherent risks and uncertainties, and actual results may differ materially from our expectations. For a description of some of the factors that could cause actual results to differ materially please refer to our earnings press release, and our most recent periodic reports on Form 10-K and Form 10-Q which are also available on our website.
Leading our discussions today are Maria Pope, President and CEO; and Jim Lobdell, Senior Vice President of Finance, CFO and Treasurer. Following our prepared remarks, we will open the line for your questions.
Now, it's my pleasure to turn the call over to Maria.
Thanks, Chris and good morning, everyone. Welcome to Portland General Electric's second quarter 2019 earnings call. Today we will share our financial results, updates on our recently filed integrated research plan, and an overview of our plan to build a new integrated operations center.
Turning to Slide 4. For the second quarter we've reported net income of $25 million or $0.28 per share, a decrease of $0.23 per share compared to 2018. Given our expectations for the balance of the year, we are reaffirming our 2019 earnings guidance of $2.35 to $2.50 per diluted share. I'll provide a summary of the factors impacting second quarter results and Jim will go into greater detail. First, net variable power costs were challenging due impart to significantly lower than average hydro productions in the Pacific Northwest. As such, our thermal plants increased generation 22% over the second quarter of 2018. Concurrently, California experienced very strong hydro conditions driving down regional power prices and decreasing hotel [ph] revenues. Second, transmission and distribution operating expenses increased due to enhanced focused on strengthening the resiliency and reliability of our system.
Turning to Slide 5. The economy in our service area is strong, although immigration has slowed the labor market remains tight with a 3.5% unemployment rate. Forbes recently reported that Portland jumped in ranking among the top cities protect talent reflecting our more cost competitive market for start-ups when compared with Silicon Valley more so [ph]. This quarter we continue to see new construction and expansion projects underway across our service area, as well the growth and energy leverage to industrial customers.
I'd like to briefly touch on 2019 order Oregon legislative session. We worked with a broad group of stakeholders in support of regulating greenhouse gas emissions through a state cap and trade program that ultimately did not pass. In future sessions, we will keep working with stakeholders towards cost-effective energy and climate policy. In addition to cap and trade, we successfully supported the bill to reduce greenhouse gas emissions in the state's transportation sector and boost the adoption of electric vehicles. We also supported several successful bills targeting energy efficiency and low income customer assistance.
Turning to Slide 6. We filed our 2019 integrated resource plan with Oregon public utility commission last month. Our filing with the product is a collaborative process that reflects transformation within our industry and our goal of reducing greenhouse gas emissions. Our plan calls for additional cost effective energy efficiency, expanding reliance on demand response, a 150-average megawatts of renewable resources by 2023, and approximately 595 megawatts capacity needed by 2025 driven by the exploration of contracts and seizing a coal-fire operations at our government coal plant offset by the capacity associated with 150-average megawatts of renewable.
We anticipate an order acknowledging our action plan in early 2020. Similar to our last IRP, we expect to conduct RFPs for renewable resources and will seek opportunities for capacity through bilateral negotiations with existing generators in the region. Given the depth of the market, if we're not able to acquire adequate capacity through these negotiations, we will conduct -- consult, excuse me, with OPSC and may conduct a second RFP also focused on non-emitting resources.
Finally, turning to Slide 7. I'm excited to announce that this week our Board of Directors approved the construction of the new integrated operation center. This center advance our integrated grid strategy and design for enhanced resilient against seismic, cyber and physical security threat. The capital costs for the new facility is estimated to be $200 million, and will be in service by 2021.
And now, I'll turn the call over to Jim. Thank you.
Thank you, Maria. Good morning, everyone. To start, I'd like to provide more detail on the specific drivers Maria mentioned, and as summarized on Slide 8.
First, gross margin decreased to total of $0.12 per diluted share, several factors contributed to this result. Water power supply portfolio performed well, it did not perform as favorable as in 2018. As such this contributed to an increase in net variable power costs. This was primarily due to the variation in market prices during the first quarter resulting from the Enbridge [ph] pipeline outage, in addition to lower hydro production, in particular, PGE-owned hydro resources in the Mid-Columbia projects resulted in a 13% decrease in production when compared to the second quarter of 2018.
Additionally, we experienced lower wholesale revenues due to a 25% decrease in the average wholesale sales price and 26% lower wholesale sales volume. An increase of $0.03 per share is attributable to an increase in our earnings power from our 2019 general rate case, and whether decreased earnings per share by $0.02 due to a decreased demand from fewer heating and cooling degree day. Next, a decrease of $0.07 is attributable to an increased focus on preventative maintenance to enhance great resiliency which drove higher distribution expense in the second quarter. There was particular emphasis on vegetation and wildfire management, overhead and underground system inspections and maintenance, along with cyber security. The next item is a decrease of $0.05 from lower production tax credit, and finally our net increase of $0.01 for miscellaneous items.
Despite some challenges and higher spending we are confident that we can achieve our earnings objectives. We are revising our O&M guidance upwards to a range of $600 million to $620 million, and we are reaffirming our EPS guidance of $2.35 to $2.50 per diluted share as we expect to see continued improvements in revenue through the balance of the year. We also expect improvements in our net variable power cost as we work towards our forecast of being below the PCAM baseline. Despite this quarter's increase in operating expenses, mitigating cost increases will be our focus as we plan for the next several years. As such we're reaffirming our 4% to 6% annual earnings growth guidance that we provided earlier this year.
On Slide 9 we've provided a summary of the company's current capital expenditure forecast from 2019 through 2023. This includes the cost associated with our integrated operation centers that Maria discussed earlier. On Slide 10 we continue to maintain a solid balance sheet including strong liquidity and investment grade credit rating. For the remainder of 2019, we expect to find estimated capital requirements with cash from operations and the issuance of debt securities upto an additional $230 million.
And now operator, we're ready for questions.
[Operator Instructions] Our first question comes from the line of. Julien Dumoulin-Smith with Bank of America. Your line is open. Please go ahead.
Thank you just call the IRP process here yeah I know we're very very early but I wanted to kind of get is that how you think about the ownership angle here in the opportunity before you just sort of thinking about structurally in and what might be different from the last go around the IRP in which there was to be some amount of award for ownership. And I mean that both of the firm happy in the renewable piece.
Thank you so on both will be looking at the option for ownership at this point in time. We expect the IRP process to be concluded fuse me in the first quarter of 2020. There's some public hearings that are already scheduled in January and then we will move very quickly into IRP for the renewal of the particular we're hoping to be able to capture some of the production tax credits on before they expire and if not should not be will be important we don't expect any significant differences from how we approach things in the past. On the capacity side, we're going to start off looking really out what we can find in the existing market with regard to bilateral negotiations are peas for existing resources all of which you're not admitting how should we not find the death in the market then we will go back and work with the commission on the putting together all further procurement processes.
Thanks. If I can follow up here just on 2 more new ones questions on this process. Historically there's been pushed back on them load and demand forecasts can you speak a little bit to the forecast that you put that you would have contemplated your level of confidence there and perhaps what made change around that from the Blackstar IRP process again to the firm that up in your view and then separately in related I suppose historically been some degree of pushback on accelerate renewal recurrent based on your existing rack balance if you will. How do you think about that now and I there's the obvious counterpoint of the Thailand for credit for tax credit expiration so any help either.
Thank you in the answer your first questions with regards to grow. This is the backdrop we've talked about this and in previous calls and then also in my remarks. Our service territory had solid ground and we see that going out into the future driven largely by in my creation but most importantly in terms of load by the tech sector and we have had extensive modeling in discussions with stakeholders including the connection and feel. If we have good consensus around the 1% number of issues in our long term forecast in with regards to production tax credit and racks and timeliness to move forward pastor with regards to procuring renewable resources is very much consistent with what our customers want us to do. It's also given the production tax credit it makes sense for us to move forward to capture those out we do not see any of our racks expiring all of your PC's expiring and so we continue to have cost effective renewables. The cost in the region are coming down quite significantly we remain calm impressed with the competitiveness of the market.
I will go back in the queue thank you.
Thank you and our next question comes from a line of [indiscernible].
Hi, thank you. My first question is on the I think your comment on the second quarter in them focusing on preventative measures on maintenance is that stuff items that you would have spent more than 2020 type here that the pull forward or could you just elaborate a little bit more there.
Absolutely. You're correct in let tell James give you some of the details on that answer.
I did too we're up in as we mentioned we're focused on vegetation management wildfires and then the inspection of the system so we're trying to make sure that we are making investments now that will help us lower operating costs in the future and that's another reason why we are a reaffirming our 46%long term growth rate.
Understood. And then separately at the couple of the operations center that you have in the capital plan HM you know little earned AC DC during the construction period have you had discussions. I know its recent but with the regulators at all or what's the process around can give a copy of that and timing of that in relation to the timing of the next rate case that you had contemplated prior previously.
You are correct that. AC DC is being calculated during the construction period associate with that and we have had primary conversations with stakeholders associate with that facility. Having up to sell if we're going to be able to respond from resiliency perspective. So we will make a determination as we move through time as to the regulatory timing of the recovery of the costs associated with that so if it's to be seen.
Understood. Thank you very much.
And our next question comes from a line of Gregg Orrill with UBS.
Hi, with regard to the change in the O&M garden. How much of that have you already spent verses is coming up in the year your view.
The good part of it has already been spent.
Thank you and our next question comes from a line of Travis Miller with Morningstar.
On the IRP in your initial conversations and planning for the filing. Could you give us a sense of that 2022 and 2023 cap backs number of $500 million how much of that is dependent on the IRP how much it is ranges of all upside if you were to get certain parts of the I. R. P. phone if you could characterize of the early parts of the I. R. P. conversation relative to that $500 million can run rate cut backs number.
None of the IRP or any RFP capitals reflected in that $500 million a run rate that $500 million run rate all reflect the number of things it reflects investment in ongoing of resiliency and maintenance all of our system upgrade it also reflects the fact that our service territory is growing quite significantly and so we have new capital investment to meet customer needs anything that might come from an ownership or otherwise options out of the IRP ours he is would be would be in addition.
Did you have any idea that it gives in terms of range of that or would it be. Of the cost of single large projects.
You could look at the way the running a large projects. we've included some 2018 call numbers in the actual I. R. P. filing for a wide variety of resources which range from solar wind to deal thermal how storage is all included in the document in terms of what we're market after minutes in 2018.
Okay on higher level what is your view in your service territory with respect to. Corporate renewable energy purchases characterize that and then arrests opportunities challenges that you have as corporate renewable energy buyers go on to your system.
That's the next question we certainly are seeing an increase in interest not only from a large corporations vertically high tech and digital companies but also from our municipalities for 100%green energy products and we've been working with them for over a year and have structured then I would call green futures program that is that hugely not well received actually in selling out in a matter of minutes let me have him love he'll go over on the faces of that that we've done and it's really been a very successful program.
As Maria pointed out we had a very robust response to phase one of what we call our green terra. And we're now working with stakeholders on phase 2 associated with that so looking at expanding the program what about ownership by the company of resources what about the ability to earn on any P. P. A.'s the con man so we're getting testimony from the parties and then we're looking for a decision associate with that by year end but as we point out in a very robust response people are corporations our customers are willing to step up to green up their portfolios. It is the rate base opportunity there any kind of capital earnings growth thank investment and that's available there it could be seen without more process that we need to go through.
Thank you.
Our next question comes from a line of Andy Levi with ExodusPoint.
I just thought there was a flood that you had where you know you show the first 2 quarters and then you have the 3rd and 4th quarter combined I think was like about 25 to a dollar 40. Could you cut it is go over that and if you tell explain what the drivers for the third and fourth quarter arcs I guess what you're trying to suggest is that you will kind of be and the values the mid-point we'll be like 242. That 125 to. 140 range.
Well if you're referring to slide number 4 in that that presentations.
Because I think the concern you know kind of looking at the stock action today you know stock down like 2%the group's kind of you know there's a lot of like we're not we're. Stuff happening today but the but now your stock so I think it would be important for you to explain in detail how you kind of make your number. What with the use the midpoint of the 242 of that dollar $25 to $40 range for the rest of the year if you could explain that to us so we can have comfort in that.
Yes and I am going to focus on a going forward we know what that the history is in the in the first half of the year and the question is what about keeping your earnings guidance that we put out the beginning of the year that this is mentioned previously as Maria mentioned we've got a lot of strong growth it's occurring in the service territory specially in the high tech sector around manufacturing around data centers and continued to see growth and a lot of other commercial activities this is hard to get around Portland because the amount of construction is going on our service territory so we're saying up a lot there we had a couple lying that is going to cover any officers to search through it use per customer we've got to continue strong growth and customer pal so that's a contributing to it we pointed out we are we are offering our power costs in line with trying to get below the P. cam baseline and we are working on cost now that will help us reduce costs and in the future.
Again, we were taking a long term view as far as our overall cost structure. In addition to that there's some geography that's going on inside the income statement from top line to heal on and expenses such as we that terminated some long term service agreements dissociated where one of our normal facilities so we ended up putting that in a balancing account in addition to that we had a storm in the in the first quarter they also have a present some geography so that while overall expenses or they're not up as it as much as you would otherwise read into it by just looking at the wrong number so that as we pointed out we are we are focused on reaching our earnings guidance that we provide for the year and for the long term.
Let me just reiterate Dennis point in that in the Pacific Northwest we can see whether fluctuation particularly hydro wind on customer uses can affect a quarter to quarter results the long term we expect that the investments that we're making our system will lower our overall cost and bear fruit and are confident in our guidance range.
Just the mention of this balancing account relative to I guess the power plant with that in the 1st quarter the second quarter?
I was in the second quarter.
Okay. And how much was that?
So anyone in it there's a once in a while a line of moving back and forth that you know are so puts and takes into the entire quarter and if we look forward work where we've given guidance on what our full O&M ranges will be and we're expecting…
Let me ask you in another way because the way that you guys tend to do things sometimes -- if you're very -- you don't really have adjusted earnings, you kind of throw everything in. So in the second quarter, whether it's the balance in the account. Can you tell us how many things were kind of one time in nature that won't be occurring next year and I'm not talking about hydro condition or anything like that but whether it is balancing account or anything else that you kind of threw in there that affected the quarter in a negative way.
Andy, there's a lot of moving pieces of that and it took a long time to go through to provide an adequate explanation associate with all those items. If you'd like to spend some time with Christian Peter on that, they'll be more than willing to provided that clarity.
We look at our costs incurred and as we are managing them going forward.
Right, but I guess what I'm trying to ask is where there's some onetime costs and nature of the second quarter. We don't know how much they are or why they do that with Chris but just in general, where there's some one-time negative costs beyond having to run your plant because of hydro conditions.
Yes, there were and we factor those into our forecast going forward.
Okay. And then just on the second half. Can you just categorize, are you -- just overall, are you trending towards the low-end of the range, the midpoint of the range, high-end of the range for the year?
I can't provide that guidance.
We appreciate the question. Thank you.
Okay, thanks.
And our next question comes from the line of Greg Reiss with Centenus.
I just try on one and he was just getting that right here looking at just kind of where you came in for the first half of the year and then the implied step up to kind of get to the midpoint of the range it's about $0.19 in the second half of the year and just looking at how the rate cases come in and it's about $0.3 a quarter section 8 year to about $0.6. I just want to get a little more color on that kind of incremental $0.13 and one that really comes from is it not bearable power costs is it some other items that maybe were not aware of that are expected to occur in second half.
No. I appreciate the question Greg yes we're mentioning Tandy and as we've stated in the are prepared remarks it really gets to we're expecting increased revenues specially the high tech sector we're expecting continued strong customer growth across we are very diligently working on our power costs and getting them down below the at the baseline and there's point out we've got efforts around 1:00 AM expenses for the balance of the year and we did have some onetime items in the in the first quarter of the year. So a combination of all those items plus bunch of cats and dogs will not get us where we've got confidence in our full year guidance.
Gotcha and it also sounded like you guys pulled forwards and 2020 expenses into 2019 is it safe to say that you would have had to have some pretty good I guess insight into how the balance of the year award to shake out in order to be able to kind of pull forward some expenses and still from the guys range.
Yes, that's correct.
Okay, great. Thank you very much.
Thanks, Greg.
Thank you and our next question comes from a line of Anthony [ph].
Good morning most of my questions unanswered just if I could jump on Greg in any question estimate you guys have provided for the benefit of growth on a year over year basis.
No we haven't provided Anthony sorry.
Well I'm good thanks so much.
One for work still expecting %growth in our near term forecast has just not happened right. But you haven't…
Yes, we are a part of that political year or anything like that now we have an answer.
Okay. Thanks so much for taking my question.
Thank you. And our next question comes from a line of Kevin [ph] with Citadel.
I just wanted to ask on the potential savings in the second half on the that terrible power because you guys are 6 million above the baseline to the first half is there any way to quantify where you think that could be in the second half I think you said you're targeting below that date it's a benefit so you're getting at least 6million back.
Kevin, all of all say is that we're dissipating begin below the baseline for the full year.
Just to follow-up on that then it is it something that that you have to see how the market conditions play outdoors do you have a fairly high degree of confidence with where your heads right now that that which is far more far less variable than just seeing what occurs over the next 6 months.
We're just working out where the power markets are today what we're anticipating what happened to the rest of the year given the current conditions and were forecasting that we think that we'll see improvements in our power cost.
Just in general in terms of the guidance overall is there anything in the first half results or with the an ONM increase that that moves you in terms of your something where you thought you were going to be in the range coming into the year are these are these things that are adjustments of where you thought you were going to be in the year where wherever that was going to be.
So they met some of these are timing adjustment systems not up on through some of these are investments that we pull forward some of them are onetime items although we're looking at the balance of the year and we main reiterate our guide but for not providing any additional insights is where we are with the neck .
Okay it is the last thing for you on the green terror upon the face to what's the time line for some clarity on whether you got to be able to invest there or not.
I believe Kevin that we should have an answer on pace to by the end of the year.
[Operator Instructions] We do have a follow-up question from the line of Julien Dumoulin-Smith with Bank of America.
Hi, not to pile up to much just be curious again about the original cost and obviously the I. O. C. with respect to confidence and earning are weeds and subsequent years 3 do in the past you've talked about. Perhaps a little bit more of a different distance between rate cases the president I mean he is there's going to be read between the lines back to the ability to earn you are weeds and I understand that you're accruing a PVC is through the construction period as well as the higher and I'm in in 28 and again I want to get too far ahead I know this onetime items in different weather very ability consistently here but did just part a little bit more on a go forward basis on confidence level to hold the line on a record.
Our confidence level isn't any different this quarter than it was before underlying our businesses is very strong Kim is mentioned we've discussed quite a bit we had a number of 1 time items and pull floored some important expenses to address in the Q-2nd how we feel confident in our guidance and no changes in our ability to are we or our plans with regards to rate case timing of the IOC or the operations center is this important project that we've been working on for over a year point 5 and have spent a lot of time talking to stake holders will be located in to Wallace and I'm just south of here in an area of seismic stability and it will include a number of are really important 247 operation are bouncing in Florida power marketing trading. Stress management all of our cyber and physical security it'll really be a modern all center that will allow us also to be able to manage our distribution system and a more integrated fashion which is heavily supported by stake holders and the commission and as we move forward so we look forward to being able to continue to talk with parties on into the integrated round the corner.
All right leave it there thank you.
Thank you
Thank you. And I'm showing no further questions at this time. And I would now like to turn the conference back over Maria for closing remarks.
Great, thank you all for joining us today. And please join us in October, we'll report our third quarter 2019 results. And for those of you attending the Goldman Sachs Conference in August or the Barclays Conference in September, we look forward to seeing you at both of those conferences. Thank you very much.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.