Portland General Electric Company (NYSE:POR) Q3 2023 Earnings Call Transcript

Portland General Electric Company (NYSE:POR) Q3 2023 Earnings Call Transcript October 27, 2023

Portland General Electric Company beats earnings expectations. Reported EPS is $0.4649, expectations were $0.45.

Operator: Good morning, everyone. And welcome to Portland General Electric Company’s Third Quarter 2023 Earnings Results Conference Call. Today is Friday, October 27, 2023. 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’s Manager of Investor Relations, Nick White. Please go ahead, sir.

Nick White: Thank you, Latif. Good morning, everyone. I’m happy you can 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 will be referencing throughout the call. The slides are available on our website at investors.portlandgeneral.com. Referring to slide 2. 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.

A close-up of an electrical power line with a bright blue sky in the background, highlighting the company’s selection of electricity and natural gas services.

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

Maria Pope: Thank you, Nick, and good morning. Thank you all for joining us today. Beginning with slide 4, I’ll start by discussing our results for the quarter and speak to the key drivers, as well as our outlook for the balance of the year. For the third quarter, we reported GAAP net income of $47 million or $0.46 per diluted share. This compares with third quarter 2022 results of $58 million or $0.65 per diluted share. Clearly, it was a tough quarter. The key drivers include; first, continued load growth from industrial customers offset by reductions in residential and commercial usage, partially driven by cooler weather overall. And second, volatile power costs from a major heat event in mid-August, which resulted in transmission congestion issues and a significant spike in energy costs.

I will touch on each in turn. Turning to slide 5. We continue to see solid growth from industrial customers, particularly data centers. However, this growth is chunky, and we saw modest growth in the third quarter. Overall, through the first nine months of the year, industrial load has grown over 6.5% compared to 2022. We foresee continued growth in the fourth quarter and potentially even higher industrial growth in the coming years. With strong legislative tailwinds at both the state and federal level, there is significant government support through grants and other incentives focused on the semiconductor sector. 15% of US semiconductor manufacturing occurs in our state, largely within PGE service territory. The sector will benefit not only from the federal chipset, but from the $240 million of the Oregon legislature has allocated to 15 semiconductor companies.

As a result of these investments, state officials are projecting over $40 billion in new Oregon projects and over 6,000 new jobs. Recent expansion announcements have been made by Intel, Microchip and Analog Devices. In the third quarter, we also saw modest reductions in residential and commercial energy use compared to last year, driven by cooler weather, in the late summer as well as energy efficiency, rooftop solar and overall distributed energy adoption. Given lower-than-planned third quarter loads, we have revised our full year 2023 growth guidance to 2% weather adjusted, consistent with our long-term expectations. The second driver of third quarter results was higher power costs stemming from the record-breaking heat event. PGE set a new peak load that surpassed our previous summer peak by 6%.

During this time, we also in this day had Mid-Columbia peak pricing of nearly $1,000 per megawatt hour, given significant transmission issues and constraints. Our generation plants performed well, very well, and we’re well integrated with our contracted energy supply. We also saw meaningful customer demand response reductions. Even still, our overall purchase power and fuel expense increased significantly. I want to thank and recognize our PGE colleagues who helped to ensure that customers continue to receive safe, reliable and underrented power throughout the heat wave. Given the impact of power costs on our third quarter results, we are narrowing our guidance range for the year. We now expect 2023 results to be in the range of $2.60 to $2.65 per share as compared to the previous range of $2.60 to $2.75 per share.

We anticipate fourth quarter results to improve as a result of normalized power cost conditions. Just as a reminder, fourth quarter 2022 regional gas prices peaked to over $55 per MMBtu and average mid-sea power prices rose to $2.65 — excuse me, $265 per megawatt hour. Additionally, while year-to-date power cost performance has been challenging relative to the annual update tariff or AUT, we anticipate a more favorable resource mix and market conditions through the fourth quarter. And finally, we expect continued effective O&M cost management and to hit our 2023 targets. Joe will walk through our trajectory for fourth quarter in more detail. Overall, our capital programs are on track, with Clearwater Wind expected to come online later this year and continued progress on our previously announced battery storage projects.

These are in addition to our base capital work that support customer growth, as well as grid improvements, focused on greater safety, as well as reliability and extreme weather resilience. Two other significant highlights from the third quarter include including our 2024 rate case negotiations and the announcement of several federal grants, which will enable the acceleration of new technologies and transmission construction. I’ll start with our GRC, which we are very pleased to conclude with parties and a way to commission order expected in the coming weeks. Overall, we settled recovery of ongoing capital investments operating and maintenance costs and notably wildfire, litigation management expenses and importantly, risk reduction in our power cost recovery framework, an important first step in addressing our PCAM mechanism which Joe will touch on in his remarks.

We also maintained a 50-50 capital structure and a 9.5% ROE. Additionally, we received approval to amortize $27 million in wildfire deferrals and collect forecasted wildfire mitigation costs under the automatic adjustment case. Lastly, federal grants. We are pleased and excited with the three Department of Energy announcements that build upon the work we’re doing to advance the clean energy transition and in collaboration with our regional partners. First, DOE announced a $250 million grant support upgrading the Bethel-Round view transmission line from 230 to 500 kV in partnership with the Confederated Tribes of the Warm Springs. The tribes have been our partner and co-owner of the 500-megawatt Pelton Round Butte Hydro projects along the Deschutes River, for decades.

Second, PGE, Utilidata and NVIDIA have consortium that was awarded $50 million grant for a smart chip grid project to improve visibility reliability and overall grid management. And lastly, the Pacific Northwest Hydrogen Association’s Hub is one of 7 projects nationwide to move forward to the next step and negotiations with DOE. PGE is contributing our former Boardman coal plant site and water rights for the green hydrogen production facility. We also look forward to an off-take agreement and working on green hydrogen power generation. These award selections represent just the start. Near-term capital will be determined in 2024 as negotiations proceed. We are still pursuing additional projects and opportunities and have submitted over $65 million in incremental grants to support another $125 million in additional projects as well as have other projects in the pipeline.

These projects represent growing momentum in the region that will create meaningful benefits for customers and communities for years to come. In summary, despite challenging operating conditions in the third quarter, we made important progress towards strengthening key cost recovery mechanisms as part of the constructive GRC settlement. Our entire team is laser-focused on execution for the remainder of the year. Our long-term growth plan is increasingly well established, underpinned by investments to meet growing customer needs, ensuring grid resilience and leading the clean energy transition. Our recent regulatory progress and ongoing capital investment reinforces our confidence at our long-term earnings growth rate of 5% to 7% in 2024 and beyond.

With that, I’ll turn it over to Joe, who will walk you through our financial results. Thank you.

Joe Trpik: Thank you, Maria, and good morning, everyone. I’ll cover our Q3 results before providing updates on our rate case, capital investments and liquidity and financing. Moving to slide 6. Our third quarter results reflect dynamic load in customer composition, challenging weather and power market conditions, continued emphasis on good resiliency and execution of our capital plan. The economy in our service territory continues to display strength. As Maria noted, regional economists anticipate significant investment in our area, particularly focused on semiconductor manufacturing. Many large high-tech companies in our footprint have signaled upcoming growth projects that could result in sizable economic benefits to our region.

Unemployment in our region was 3.4% as of September below the national average of 3.8%. Industrial load growth continued, albeit at a more moderate rate than witnessed in the first and second quarters, which we see as a short-term deviation on a long-term industrial growth trend. Total Q3 2023 loads increased by 0.2% weather-adjusted compared to Q3 2022. On a non-weather adjusted basis, total load decreased 0.9% year-over-year as weather was less severe across the full quarter despite a hotter August. Q3 2022 average temperatures were the hottest on record for the third quarter in our region. We continue to see significant heat this summer, but we saw a milder weather in September, which had 35% fewer cooling degree days than compared to 2022.

Residential load decreased 2.5% or 0.5% weather-adjusted compared to Q3 2022. Fewer cooling degree days and increased energy efficiency and distributed energy resource adoption contributed to this decrease. Residential customer growth increased 0.7%. Commercial load decreased 2.1% or 1.2% weather adjusted as we also witnessed increased penetration of energy efficiency and DDRs among commercial customers. Industrial load growth continued in Q3 2023, increasing 2.5% or 2.7% weather adjusted. As Maria mentioned, we view this moderation compared to previous quarters as temporary and anticipate a continuation of the growth cycle that we have been observing in recent years. Third quarter power market conditions remain challenging in 2023 with resource scarcity during the peak period surrounding the August heat event having acute impact on the quarter.

I’ll now cover our financial performance quarter-over-quarter. We experienced an $0.18 decrease in total revenues driven by a 0.9% decrease in total deliveries, combined with unfavorable changes in the average price of deliveries due to lower residential and commercial loads. Q3 2022 power cost conditions were also challenging and $0.27 of the quarter-over-quarter earnings change is attributable to power cost headwinds in 2022 that we normalize for this comparison. Current year power costs were also elevated, driving a $0.07 EPS decrease in the quarter, reflecting costs that were higher than anticipated in our annual update tariff. There was a $0.02 decrease in EPS from higher operating expenses, net of deferral-related items, primarily driven by higher generation and grid maintenance costs.

We also saw a $0.06 impact from depreciation and amortization expense due to higher plant balances year-over-year. A $0.03 decrease from the impact of higher interest expense due to higher long-term debt balances and short-term debt balances carried for a part of the third quarter, a $0.07 decrease due to the dilutive impact of draws on the equity forward sale, which last occurred in mid-July. Finally, we had a $0.03 decrease from other items, which included $0.08 of a decrease in other income due to the prior year medical plan buyout gain did not reoccur, partially offset by $0.03 increase from higher AFUDC from clean energy and base capital projects under construction and $0.02 increase from higher returns on nonqualified benefit trust and other miscellaneous items.

Turning to Page 7 for a summary of our 2024 general rate case to-date, which remains subject to OPUC approval. As Maria highlighted earlier, we are pleased to reach a constructive settlement on the remaining items, including recovery of recent capital investments and operating costs to maintain the system reliability and resiliency. Given the frequency and magnitude of extreme weather and resource constraints in our region, including the August heat event, the reliability contingency event provision represents a constructive solution to our power cost recovery framework. This update better reflects the impact of climate change and dynamic regional markets that we have been historically experienced. Additionally, steps in the docket will continue in the coming weeks, including annual power cost updates in November.

A commission decision is expected by December but could come sooner for rates effective January 1st, 2024. On to Slide 8, which shows our current capital forecast through 2027. We are continuing to evaluate emerging transmission projects that Maria and I mentioned in the Q2 call and plan to provide a robust capital forecast update on the Q4 call in February. I will also note that the PGE portion of projects receiving grant funds is not yet reflected in these figures as scoping and negotiations are ongoing. We will reflect these projects in our forecast once final plans have crystallized. The 2023 RFP has worked through preliminary administrative steps and is expected to officially launch to the market in the coming weeks. Submissions are expected in early 2024, with submission of a project shortlist anticipated in the first half of next year.

Project selection will take place shortly after in mid-2024. Turning to Slide 9 for a summary of our liquidity and capital finance — sorry, our liquidity and financing. Our strong balance sheet, investment-grade credit ratings, and stable credit outlook remains unchanged from our previous disclosures. Total available liquidity as of September 30th, 2023, is $925 million. In mid-August, we amended our existing revolving credit facility to extend the maturity, while also upsizing from $650 million to $750 million to provide additional flexibility. We also executed a $500 million first mortgage bond purchase agreement in late August, including $300 million of that that was issued as of September 30th, with the remaining $200 million to be issued under a delayed draw feature in the fourth quarter.

As I said previously, we issued the remaining $92 million under the equity forward facility in July, and we continue to have equity market availability under our ATM program. PGE has entered into forward sales agreements for $58 million of the total $300 million of the ATM as of the third quarter. We remain confident in our balance sheet and our ability to access the capital markets. and continued strong interest from both debt and equity investors in recent offerings. Careful dilution management remains an important focus as we continue to track towards our authorized 50-50 capital structure over time and maintain flexibility in financing options. Our results in the third quarter continue to reflect our investment year thesis as we execute to establish a sturdy growth foundation for PGE.

They also reflect ongoing challenges that we are all working to diligently manage through year-end. Some of the headwinds we have faced through Q3 are expected to dissipate in the last three months of the year, including empower cost. Turning to Slide 10 for our outlook for the fourth quarter. As Maria touched on earlier, indicators point to a more reasonable power market condition, especially compared to Q4 2022, which saw cold weather, pipeline disruptions and regional gas storage anomalies drive Pacific Northwest gas and power prices to extreme levels. Due to these factors, fourth quarter power costs were meaningfully higher than considered in the AUT baseline, which is represented in the chart. We expect impacts of load growth, depreciation, interest expense and dilution observed year-to-date to continue.

Operating cost execution remains a critical component of our plan and all corners of our business are leaning in to drive savings and results. Given these efforts, we expect our fourth quarter O&M to come in below our current full year run rate. Finally, we expect an improved resource mix compared to our AUT expectations that will allow us to make up ground in our annual power cost position. This includes better availability of generating resources improved plant outage expectations and portfolio optimization that allows strategic dispatch of our generation fleet. Due to load results in the third quarter being below expectations, we are revising our 2023 full year weather-adjusted load growth guidance from 2.5% to 3% to 2%, which is in line with our long-term expectations.

We continue to have strong visibility to incoming projects concentrated among digital and high-tech customers, which are continuing their growth path. As such, we remain confident in the load profile in our area and are reiterating our long-term load growth guidance of 2% through 2027. As Maria noted earlier, we are narrowing our full year earnings guidance to $2.60 to $2.65 per diluted share to reflect power cost challenges experienced in the third quarter. We have sharpened our load expectations for Q4 and anticipate power costs and O&M execution will drive necessary results to achieve this range. 2023 continues to represent a key pivot point for our direction towards sustained growth and value for customers and shareholders. Constructive regulatory clarity, a robust capital investment pipeline and solid service territory fundamentals give us renewed confidence in reaching our earnings growth guidance of 5% to 7% in 2024 and beyond.

As we enter the final months of 2023, our ongoing focus of providing clean, reliable and affordable energy remains unchanged. We look forward to furthering this core mission, which will enable prolonged value for our customers, communities and shareholders. 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 Shahriar Pourreza of Guggenheim Partners.

A – Maria Pope: Good morning, Shah.

Joe Trpik: Good morning, Shah

Shahriar Pourreza: Good morning, Maria. Good morning, Joe.

Joe Trpik: Good morning

Shahriar Pourreza: Joe, you discussed getting, I guess, a little bit more in the weeds on the CapEx profile on longer term run rate, right, regardless of the RFPs. I know, obviously, we’re going to get an update in 4Q, but you’ve been in the seat for a few months now, and we’re still kind of looking at that declining CapEx profile on the slides. Can you just maybe elaborate on what you mean by robust. I mean is it fair to assume that $800 million run rate will step up materially? Just directionally, how we should think about it as we head into the fourth quarter. Thanks.

Joe Trpik: Hey, thanks, Shar. So the way I look at it is, when we say more robust, I think we would like to provide more transparency as we work through 2024 and the further years of our base business, the transmission that Maria had mentioned before as well as what I’ll call the potential for the opportunities, be it the RFPs that we’ve spoken to and the grants. I would not be unreasonable to say there’s some upward pressure there. But Shar, that’s what we’re waiting for is as we get through the rate case outcome here and get a little more clarity on the transmission plan and the grants that we hopefully, can give a little more of a transparent longer view of the possibilities as opposed to what is — as you see there, a relatively flat plan. In part that will also weigh into that as it relates to that base, I should say, is the most — how the most recent IRP that has come out impacts our base capital as it relates to supporting renewables as well.

Shahriar Pourreza: Got it. And then just on the financing side, Joe, just obviously, I guess how should we think about the forward equity findings and for any sort of wins under the next RFP round, I think it’s awarded next year, right? So you have an ATM now. Is that kind of the avenue you’re going to look at this point?

Joe Trpik: Well, I think we continue to evaluate based on the expectations and the outcomes that will come from the RFP our approaches. But I mean, I think an approach that starts with a base of having an ATM to support us, right? We can — we currently as much as we have about $250 million left to issue, right? The cash flows of the ATM are still — we haven’t yielded any from so far. But we’ll continue to evaluate the ATM as it relates to supporting our business from a – from a base transmission and others and then evaluate it on an episodic basis based on the size of the — any of these significant wins that could come from an RFP.

Shahriar Pourreza: Okay. Got it. And then lastly, just for me is maybe just tied a little bit deeper into the power cost aspect of the settlement. I guess how do you see the mechanism you got for, let’s just say, extreme events is actually insulating the EPS volatility. For example, like how would have impacted this quarter if you had it in place that past August. Thanks.

Joe Trpik: All right. And then so the mechanism itself is not finalized as of – as of yet. But based on our understanding, so that the definition of an event, there would be three items that would – that would come in to play as evaluating the — if there was an event, which would be the day ahead Mid-Columbia index price, BG’s eligibility to request resource adequacy assistance and then a neighboring balancing authority that’s publicly declared an event. So those are sort of what we believe the definition would be. So if we applied those, we do believe the heat event that occurred in August, would have triggered that definition. We would also believe that if we were to look to the prior years, there was a significant collection of events that not just the seat about if we were looking to 2022 and 2021, there are several events that would meet that.

So we do believe that a portion of our costs that are incurred in this current year would have been defined to pull into that. We’re not – because the commission hasn’t issued an order, and we haven’t finalized, we’re not at the point of declaring what that value or average would be. But once the orders come out, we have that clarity. We’ll consider, discussing what that average impact would have been over the last number of years here, potentially as we get to year-end. But is there something there? Yes. Are these events something that occur at least annually or so? Yes.

Shahriar Pourreza: Okay. Perfect. Thank you, guys. We’ll see you in a couple of weeks. Appreciate it.

Joe Trpik: Well. Thank you.

Maria Pope: Thank you.

Operator: Thank you. Our next question comes from the line of Richard Sunderland of JPMorgan.

Maria Pope: Good morning.

Joe Trpik: Good morning.

Richard Sunderland: Can you hear me?

Maria Pope: Yeah.

Joe Trpik: Yes.

Richard Sunderland: Great. Thanks for the time today. A lot of helpful color on the quarter and looking at the 4Q here as well, maybe starting on the O&M, I just wanted to make sure it’s parsing this correctly. It sounds like you were standing up some savings specifically to help this year. Is that the case? And how does that flow through versus, I guess, effectively, you’re planning at the start of the year? And then just to be more precise on kind of 2023 versus beyond. Are any of these savings kind of structural into 2024 and more long-term?

Maria Pope: So, Joe, do you want to take this one?

Joe Trpik: Sure. Good morning, Richard. So as it relates to O&M. So yes, we do believe some work that we’ve been doing throughout the year, when I say throughout the year, more think to April and beyond. Will yield some benefits to us financially as reducing us below our run rate that we’re currently after the full year? Yeah. We did see a sort of a reduction in our — what I’ll call our, overspend to expectation in the third quarter, but we were still over, but we expect in the fourth quarter, we will yield some O&M savings. Those O&M savings are meant to be like a structural going forward, management of our cost. I mean, so we would expect to have the same structure in place. These are not one-time items to achieve benefits for the year, but more structural items as we relate to changing the way we manage our costs and run our business going forward. So we would expect that will continue.