Portland General Electric Company (NYSE:POR) Q1 2024 Earnings Call Transcript

Portland General Electric Company (NYSE:POR) Q1 2024 Earnings Call Transcript April 26, 2024

Portland General Electric Company beats earnings expectations. Reported EPS is $1.08, expectations were $0.97. POR isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, everyone, and welcome to Portland General Electric Company’s First Quarter 2024 Earnings Results Conference Call. Today is Friday, April 26, 2024. This call is being recorded, and as such, all lines have been placed on mute to prevent any background noise. [Operator Instructions] For opening remarks, I will turn the call over to Portland General Electric’s Manager of Investor Relations, Nick White. Please go ahead, sir.

Nick White: Thank you, Norma. Good morning, everyone. I’m happy you can join us today. Before we begin this morning, I would 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 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 release and our most recent periodic reports on Forms 10-K and 10-Q, which are available on our website.

Turning to slide three. Leading our discussion today are Maria Pope, President and CEO; and Joe Trpik, Senior Vice President Finance and CFO. Following their prepared remarks, we will open the line for your questions. Now it’s my pleasure to turn the call over to Maria.

Maria Pope: Thank you, Nick, and good morning everyone. Thank you for joining us. Portland General Electric is on track in 2024, and the stage is set for steady, normalized growth. After tough weather and extensive customer restoration in January, our results this quarter speak to strong execution. Beginning with slide four, I’ll speak to our financial results and key drivers. For the first quarter, we reported GAAP net income of $109 million or $1.8 per diluted share. On a non-GAAP basis, net income was $123 million or $1.21 per diluted share. This compares with first quarter 2023 GAAP net income of $74 million or $0.80 per diluted share. First quarter 2024 GAAP results excluded the 20% non-recoverable cost of the reliability contingency event incurred in the January storm event.

Results this quarter, which Joe will discuss in his remarks, were driven by robust low growth from semiconductor and data center customers and our focus on operational execution. This focus was evident throughout the quarter and no more so than during the January storms. Our PGE team members navigated regional resource constraints, gas network disruptions, severe winter conditions that resulted in hundreds of thousands of customer outages. I’d like to again commend and thank my colleagues for their extraordinary work during this challenging event. As we look ahead to the balance of the year and beyond, we remain focused on three main areas. First, rapid transformation of our energy systems propelled by continued investments in our service territory by semiconductor and digital infrastructure customers.

Second, executing our capital plan to meet customers’ priorities for clean energy and increased grid resilience, and third, delivering on our ongoing commitment to operational discipline by reducing risk, controlling cost, driving efficiency and managing customer affordability. This is a period of rapid growth and transformation for both our energy system and our region. The robust growth of the semiconductor and digital sectors will enable system-wide infrastructure and reliability investments and will continue to engage our customers, regulators and other stakeholders to ensure that this growth benefits all customers, industrial, commercial and residential alike. We continue to see significant residential transformation in our region as well, with strong growth of rooftop solar and electric vehicle adoption.

Together, these changes are requiring us to think differently and innovate as we build and upgrade transmission and energy infrastructure on a scale reminiscent of what our industry first electrified the west. Moving to slide five, industrial growth. First, industrial load growth increased 4.9% compared to the first quarter last year. State and federal investments are bolstering semiconductor expansion in our service area. This quarter, Intel announced investments across four states, backed by $8.5 billion in federal funding. Intel expects that $36 billion will be spent in Hillsboro, Oregon, in the western part of our service territory. This is in addition to the significant semiconductor investments by analog devices, microchip and many others.

This will drive economic growth for years to come, hoping to cement Oregon’s Silicon Forest as the premier hub for semiconductor manufacturing, research and development. These investments will have broad benefits across our region, strengthening our communities, creating jobs, providing workforce development and higher education opportunities. Moreover, Oregon continues to reinforce its position as a hub for the digital infrastructure that underpins our global economic growth fueled by generative AI. A recent study by Cushman & Wakefield ranked Oregon as the fifth largest data center market nationally and eight globally. With this mature digital ecosystem in our area, we’ve been fortunate to enable growth, observe emerging trends and plan accordingly.

Last year, as part of our combined clean energy and integrated resource plan, we increased our expectations for industrial energy usage in our service territory by over 40%, anticipating the rapid growth that we are seeing today. Additionally, these plans emphasize the need for expanded transmission investments, which we highlighted in our recent capital plan update. As industry continues to reshore and expand, we recognize the importance of electric infrastructure, clean energy supply and reflecting our region’s focus on sustainability, economic security and transformative opportunities for our next generation. Capital plan execution, the ambition and clean energy goals of our customers underscore the importance of Portland General Electric’s commitment to transform our energy systems, to pursue clean energy resources and expand transmission and invest in grid resilience.

These investments not only position us for long-term growth, but also create significant benefits for all customers. Our generation, battery storage and grid infrastructure projects are great examples. The forthcoming, constable and seaside battery storage projects will play a critical role in matching variable renewable production with customer demand. The flexibility these batteries provide will allow us to navigate increasingly frequent and costly periods of power cost volatility. Similarly, the clear water development that came online in January has allowed PGE to generate more wind energy than ever before and will lead to customer price reduction while providing important geographic resource diversity. We’re also continuing to modernize and harden our grid to accommodate emerging technology and to improve resilience in the face of severe winter and summer weather.

These investments on behalf of customers from battery storage to grid modernization and resiliency projects are at the center of our 2025 general rate case filed in February, which Joe will touch on shortly. Operational discipline. As we advance critical investments to strengthen our system, affordability remains squarely in focus. This means finding opportunities to drive efficiencies and savings through power cost management and operational discipline. In March, PGE announced plans to join other Western utilities in the CAISO extended Day-Ahead market. EDAM offers us a larger operational footprint that will enhance reliability and help alleviate power cost pressure. On the operational front, PGE teams are deploying technology to prioritize work, optimize business processes, and focus on key risks like cybersecurity and wildfire mitigation.

For example, as we progress through our year-round wildfire program, we’re enhancing our vegetation management and investing in system hardening, situational awareness, and operational practices. This includes AI equipped cameras, weather stations, reclosers, fire mesh pole wrap, and early fall detection. As we look ahead, we have a solid first quarter and we are focused on execution and delivering on expectations. Our plans are exciting, achievable, and we’re going to get it done. With that, I’ll turn it over to Joe, who will walk us through our financial results in more detail. Thank you.

Joe Trpik: Thank you, Maria, and good morning, everyone. Turning to slide six, our Q1 results reflect continued demand growth from industrial customers, dynamic weather, and ongoing efforts to de-risk our operations. Weather in our area was variable throughout the quarter, with colder conditions in January, followed by more mild conditions in February and March. Overall, heating degree days for the quarter were 8.9% lower than in Q1 2023. Q1 2024 loads decreased by 0.9%, but increased by 1.2% weather adjusted compared to Q1 2023. 2024 residential load decreased 3.6% year-over-year due to mild weather, but increased by 0.5% weather adjusted. Residential customer accounts increased 1.3%. Commercial load decreased 2.1% or 1.3% weather adjusted, driven largely by lower commercial activity, during the January-winter storm.

The industrial class sustained its momentum, with load increasing 4.9% for 5.2% weather adjusted. Demand growth for digital and semiconductor customer’s supports this growth trend, reinforced by the ungrowing investment, Maria highlighted. We maintain good visibility to our robust pipeline of incoming projects and remain confident in the strength of our service territory. Given these factors, we are reiterating our 2024 weather adjusted load growth guidance of 2% to 3%, and our long-term growth guidance of 2% through 2027 [ph]. I’ll now cover our financial performance quarter-over-quarter. We observed a $0.03 decrease in revenues, primarily due to weather-driven decreases in deliveries. An $0.18 increase resulting from the right sizing of our cost structure and improved recovery of wildfire mitigation, vegetation management, other O&M, and capital assets serving customers.

Power cost drove a $0.30 increase in EPS, driven by a $0.13 EPS increase due to power cost detriment in Q1, 2023 that reversed for this comparison. And a $0.17 increase in EPS from lower power cost than anticipated in the annual update pair, driven by de-risking actions taken throughout the quarter. We had a $0.04 decrease in other items, including the diluted impacts of recent equity draws, lower regulatory program interest, and higher property taxes, partially offset by higher AFUDC and lower income tax expense, generally from PTC [ph] impacts. And lastly, a $0.13 decrease to GAAP EPS resulting from the 20% portion of non-recoverable January storm RCE cost, bringing us to a GAAP EPS of $1.08 per diluted share. After adjusting for this $0.13 impact, we reached our Q1 2024 non-GAAP EPS of $1.21 per diluted share.

Onto Slide seven, for our current capital forecast. Our plan for 2024 remains on track, including progress on the Constable and Seaside Battery Project, as well as our transmission and base system investments. The ongoing RFP is moving ahead as we seek additional resources to serve customer growth and make progress on our clean energy targets. Bid submissions will conclude in April and we will then move to the evaluation and scoring phase as selection criteria continue to focus on lease costs and lease risk. Submission of a short list for acknowledgment by the OPUC is expected in early Q3 and bid selection is anticipated in the third or fourth quarter. We will keep you updated as the RFP progresses. As we noted previously, the figures in our capital plan do not include any potential forthcoming RFP projects.

Turning to slide eight for a summary of the 2025 general rate case filed in late February. This filing is largely focused on the recovery of our incoming battery storage project and continued system investments for reliability, resiliency, and grid modernization. A procedural schedule has been posted for the rate review docket and we look forward to engaging stakeholders at upcoming settlement discussions, the first beginning next week. Review of the filing will continue through the year and all items remain subject to OPUC approval. New customer rates are anticipated at the beginning of 2025. On to slide nine for a summary of our liquidity and financing. Total available liquidity at March 31 is $1.1 billion. Our investment grade credit ratings, stable credit outlook, and balance sheet strength remain static since our last disclosure.

In late February, we executed $450 million in long-term debt issuances and in March, we drew $78 million previously priced under our ATM program focused on rate-based investments. The ATM continues to provide adequate capacity and flexibility to support our ongoing base capital plans and our access to both equity and debt capital markets remain strong. Capital structure maintenance, terrible pollution management, and capital deployment for accretive rate-based investments remain the pillars of our financial strategy. We’ll continue to calibrate our approach as investment opportunities evolve, including from the RFP, and we will keep you informed as we proceed. Reflecting on Q1, our results represent a solid step forward in our long-term growth trajectory.

This plan is underpinned by our continued focus on operational efficiency, thoughtful cost management, and strategic capital investment. The strength of our region, highlighted by the continued load growth expectations noted earlier, as well as our focus on consistent execution and performance give us confidence in our performance for the year and beyond. As such, we are reaffirming our 2024 adjusted guidance of $2.98 to $3.18 per share and our long-term earnings and dividend growth guidance of 5% to 7%. Regarding dividends, we recently announced a $0.10 annual dividend increase in line with our targeted growth range and our 60% to 70% payout ratio target. As we turn to the balance of 2024, we remain centered on our strategic plan that will deliver results and value for our customers, shareholders, and the communities we serve.

And now, operator, we are ready for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Richard Sunderland with JP Morgan. Your line is now open.

Richard Sunderland: Hi, good morning. Can you hear me?

Maria Pope: Yes, we can.

Richard Sunderland: Great. Thank you for the time today. You appreciate the color on the RFP process. I’m curious if the projects come through with the pace you expect. What could that potential equity need be? And just for comparison’s sake, how should we think about that equity versus equity for the base plan as it stands today?

Maria Pope: Sure. Let me have Joe talk to you about our financing plans and how we’ve reflected them. But overall, with the RFP process, we expect a really robust pipeline of renewable and capacity projects. We should probably have a good shortlist as well as sort of conclusions around the late second quarter, beginning of the third quarter. And we would hope to be able to have contracts executed towards the end of the year, maybe even spilling into the first quarter. Joe, with regards to equity.

Joe Trpik: Good morning, Richard. As it relates to equity, any equity need coming from the RFP would be incremental to our plan. And we have said that we expect to finance that in both a solution management approach, matching the cash flows to the needs as well as possible, as well as maintaining a 50-50 cap structure balance. As it relates to pricing, we will wait and see how this sizes out. I mean, I think our guidance that we — I’m sorry, our illustrative presentation that we give on rate-based growth in our investor deck is probably our best proxy to build off of as it relates to equity needs. To Maria’s comment, we do anticipate a pretty active RFP process and timing-wise and cash flow-wise, as you think about it, we are looking for projects that are able to come online by the end of 2027 that also align with what is our preferred portfolio.

Richard Sunderland: Okay, understood. Thanks for the color there. And then, turning to the rate case, appreciate its early, but how is the process unfolding so far? I’m hoping you can frame the revenue ask here versus the prior few cases in thinking across size and composition of, say, capital, O&M, and power. And then, given this follow-up to last year’s case, is settlement, the expected outcome here? How should we think about that?

Joe Trpik: So, sure, I’ll start us off on the rate case. So, the rate case focus that we have for this case is mainly about capital. So, I would think of it as 65% of this case is capital, and then 25% O&M and 10% for our power cost. This is a change from our last case. Our last case upon ultimate settlement, over half of the case was power cost. So, we really look at this case as making sure that we’re as efficient as possible and really looking for recovery of putting these assets in service, including the battery projects that we’ve talked about that really drive benefits for the customer. And then, as it relates to settlement, the settlement processes will start next week, as I mentioned previously, and we hope to get aligned with parties to be able to settle. But each case stands on it’s own, and we hope to have a pretty open and productive dialogue with all interested parties starting soon.

Richard Sunderland: Okay, got it. I’ll leave it there for now. Thank you very much for the time.

Maria Pope: Thank you.

Operator: Thank you. One moment for our very next question. Our next question comes from the line of Shahriar Pourreza with Guggenheim Partners. Your line is now open.

Shahriar Pourreza: Hey, guys.

Maria Pope: Good morning, Shahriar.

Shahriar Pourreza: Good morning Maria. Maria, I know this year has kind of a shorter session for the legislature. Can you give us any updates on efforts around maybe a state wildfire fund and what the groundwork, if any, looks like for the longer legislative session ahead? I mean, given what you know today, is this something you could see get done by ’25? Thanks.

Maria Pope: Sure. We are working on legislative solutions both at the state and the federal level. And on the state side, we have been talking with a number of parties from the forest organization, to representatives and senators to our customers and to leadership across the entire state. Clearly, wildfires is a societal risk and we want to address it from a societal solution, not just one that’s solely focused on the utility, but a broad set of solutions that really works for Oregon. And then also on the federal side, there’s a lot of discussions taking place from how our forest lands are managed nationally through the U.S. Forest Service and the Bureau of Land Management to also ensuring that not only utilities have access to insurance, but also homeowners and others.

This area, combined with all of the operational work that we’re doing, the very important operational work we’re doing is our number one priority, to keep our customers and the communities that we serve safe.

Shahriar Pourreza: Got it. Perfect. Thank you for that. And then just on power cost, I mean, you had a substantial deferral during the storms in January and the NVPC is otherwise kind of below the baseline. Can you remind us, is there a cap on the amount you could defer under the RCE construct? Can we just — I guess, can we just put a finer point on what you saw during the event and how it interacts with the NVPC? And then secondly, how are things, you know, hydro snow-pack looking for the summer peak? Thanks.

Maria Pope: Sure. So let me take the first one in terms of the conditions during the January period of time. It was really extraordinary. Early on the January event, Alberta came very close to a true energy crisis and that spilled over into the Pacific Northwest. Later on, a couple of days later, a major storage facility in the Pacific Northwest came offline. And so generators throughout the entire region scrambled. We maximized energy flows coming in from the desert Southwest and California, but we hit a number of transmission constraints. And we also brought in much higher levels of power out of British Columbia. Most of that was hydro-based. What we have seen is that our experience was not too different from some other large investor-owned utilities.

Through our RCE mechanisms, we are able to defer 20%, excuse me, we’re able to defer 80%, and then we retain 20%, which closed through the PCAM mechanism. There is no cap on that. And we are overall really focused on managing power costs. We’ve seen them come up quite significantly and big issue for us as well as for others. With regards to hydro conditions, they’re pretty similar to where they were last year. Obviously, we’re in the springtime and so we’ll see hydro pickup in the second quarter. And quite frankly, we have stronger flows than we expected in the first quarter. As you look towards the summertime, there is very little snow-pack in Canada and in British Columbia in particular, where most of our hydro comes and what drives the market price of power through the region.