Q1 2024 Portland General Electric Co Earnings Call

Participants

Nick White; Investor Relations; Portland General Electric Co

Maria Pope; Independent Director; Portland General Electric Co

Joseph Trpik; Chief Financial Officer, Senior Vice President - Finance; Portland General Electric Co

Richard Sunderland; Analyst; JPMorgan

Shar Pourreza; Analyst; Guggenheim Partners

Paul Fremont; Analyst; Ladenburg Thalmann & Co. Inc.

Gregg Orrill; Analyst; UBS Equities

Willard Grainger; Analyst; Mizuho Securities USA

Presentation

Operator

Good morning, everyone, and welcome to Portland General Electric Company's fourth-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've 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 our actual results to differ materially, please refer to our earnings press release and our most recent periodic reports on Form 10-K and 10-Q which are available on our website.
Turning to slide 3, 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'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 4, 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 $0.8 per diluted share. First Quarter 2024 GAAP results excluded the 20% nonrecoverable costs of the reliability contingency events incurred in the January storm events results this quarter, which Joe will discuss in his remarks, were driven by robust loan 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 PG. team members navigated regional resource constraints, gas network disruptions, severe winter conduct 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 resiliency and third, delivering on our ongoing commitment to operational discipline by reducing risk, controlling costs, driving efficiencies 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 we'll continue to engage our customers, regulators and other stakeholders to ensure that this scrip benefit. It's growth, benefit, all customers, industrial, commercial and residential lot. 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 one, our industry first electrified West.
Moving to slide 5, 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.
Helping to cement Oregon silicon Forest has 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 A., I 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 observed 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 emphasized the need for expanded transmission investments, which we highlighted in our recent capital plan update. As industry continues to reshape core and expands, we recognize the importance of electric infrastructure, clean energy supply and reflecting our region's focus on sustainability economic security and transformative operational 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. It also creates significant benefits for all customers. Our generation, battery storage and grid infrastructure projects are great examples. Forthcoming Constable and Seaside battery storage project play a critical role in matching variable renewable production with customer demand. The flexibility. These batteries provide flow allows to navigate increasingly frequent and costly periods of power cost volatility.
Similar to Clearwater development, it 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 advanced critical investments to strengthen our system. Affordability remain squarely in focus this means finding opportunities to drive efficiencies and savings through power cost management and operational discipline.
In March, CG announced plans to join other western utilities in the case of extended day-ahead market Edap offers us a larger operational footprint that was enhanced reliability can help alleviate power cost pressure.
On the operational front, CG teams are deploying technology to prioritize work, optimize business processes and focus on key risks like cyber security and wildfire mitigation. For example, as we progress through our year-round wildfire program, we are enhancing our vegetation management and investing in system hardening situational awareness and operational practices. This includes AI. equipped cameras, weather stations, reclosable fire, Miss Paul Rapp and early fault 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

Joseph Trpik

Thank you, Maria, and good morning, everyone. Turning to slide 6, our Q1 results reflect continued demand growth from industrial customers, dynamic weather and ongoing efforts to derisk 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 customers supports this growth trend reinforced by the unbroken investment. Really a highlight you 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 2022.
I'll now cover our financial performance. Quarter over quarter, we observed a 3% decrease in revenues, primarily due to weather-driven decreases in deliveries, an $0.18 increase resulting from the rightsizing of our cost structure and improved recovery of wildfire mitigation, vegetation management, other O&M and capital assets serving customers. Power cost drove a $0.3 increase in EPS driven by a $0.13 EPS increase due to power cost detriments in Q1 2023 that reverse for this comparison and the $0.17 increase in EPS from lower power costs than anticipated in the annual update tariff driven by de-risking actions taken throughout the quarter, we had a $0.04 decrease in other items, including the diluted impact of recent equity draws lower regulatory program interest and higher property taxes, partially offset by higher AFUDC and lower income tax expense generally from PTCPA., and lastly, a $0.13 decrease in GAAP EPS resulting from the 20% portion of nonrecoverable January storm RC E costs, bringing us to a GAAP EPS of $1.8 per diluted share after adjusting for this $0.13 impact. We reach our Q1 2024 and non-GAAP EPS of $1.21 per diluted share.
On to slide 7 for our current capital forecast our plan for 2024 remains on track, including progress on the Constable and she died battery projects as well as our transmission and base system investment. The ongoing RFP is moving ahead as we seek additional resources to serve customer growth and made progress on our clean energy targets. Bid submissions will conclude in April, and we will then move to the evaluation and scoring base as selection criteria continue to focus on lease costs and lease risk. Submission of the shortlist 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 we are in progress. As we've noted previously, the figures in our capital plans do not include any potential forthcoming R&D projects.
Turning to slide 8 for a summary of the 2025 general rate case filed in late February. This filing is largely focused on recovery of our incoming battery storage projects 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 9 for a summary of our liquidity and financing. Total available liquidity at March 31st 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 base invest. The ATM continues to provide adequate capacity and flexibility to support our ongoing base capital plan and our access to both equity and debt capital markets remain strong.
Capital structure, maintenance, careful dilution management and capital deployment for accretive rate base investments remain the pillars of our financial strength. And we continue 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, invest the strength of our region, highlighted by the continued low growth expectations I noted earlier, as well as our focus on consistent execution and performance gives 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 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.

Question and Answer Session

Operator

(Operator Instructions) Richard Sunderland, JPMorgan.

Richard Sunderland

Can you hear me?

Maria Pope

Yes, we can.

Richard Sunderland

Great. Thank you for the time today. Appreciate the color on the RFP process. I'm curious as the projects come through at 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 to have really robust pipeline of renewable and capacity projects. We should probably have a good short list as well. So conclusions around the second Atlanta 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 that's spilling into the first quarter. Joe, with regards to equity

Joseph Trpik

Good morning, Richard add 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 pay-go solution management approach, matching the cash flows to the needs as well as possible as well as maintaining a 50 50 cap structure balanced as it relates to pricing, we will we will wait and see how this sizes out.
I mean, I think are our guidance that we are. I am sorry, are illustrative of the presentation that we give on rate rate-based growth in our investor deck is probably our best proxy to build off of as it relates to through equity 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 aligns what is ours, our preferred portfolio.

Richard Sunderland

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

Joseph Trpik

And since you're out of All-Stars up on there on the rate case, so you are the rate case focus that we have this case is mainly about CapEx. So I would think of it as 65% of this case is capital and then 25% O&M and 10% for our power costs. This is a change from our last case. Our last case were on upon open settlement over half of the case with power costs. So we really look at this. This case is making sure that we're efficient as efficient as possible and really and 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 certainly the settlement process fees will start next week, as I mentioned previously, and we hope to get aligned with with parties to be able to settle on. But you have to each case you have standalone on its own and we just we hope to have a pretty open and productive dialogue with with all interested party studies.

Operator

Shar Pourreza, Guggenheim Partners.

Shar Pourreza

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 ground work, if any, looks like for the longer legislative session ahead.

Maria Pope

I mean, given what you know today, is this something you could see get done by 25 things long term, 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 force organizations to representative senators to our customers and to our leadership across the entire state. Clearly, WildFire is a societal risk, and we want to address it from a societal. So as a 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 plans to also ensuring that not only utilities have access to insurance, but also homeowners and others from 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.

Shar 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 MTPC. 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 NDPC.? And then secondly, how are things, you know, Hydro snowpack looking for the summer peak tanks?

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. The January event Alberta came very close to a true energy crisis and that spilled over into the Pacific Northwest and later on a couple of days later, a major storage facility in the Northwest came offline. And so generators throughout the entire region are scrambled. We maximize energy flows coming in from the desert, Southwest and California, but we hit a number of transmission constraints.
And we also brought in at much higher levels of Colorado, British Columbia. But most of that was hydro base. What we have seen is that our experience was not too different from some other large investor-owned utilities on to our RCE. of the U.S. mechanisms. We are able to defer 20% if you think we're able to defer 80%. And then we retain 20% was closed through the PCAM. mechanism. There is no cap on that. And we are overall really focused on managing power cost.
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 this springtime, and so we'll see hydro pickup in the second quarter. And quite frankly, we have stronger flows 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. So even though you see year-to-year similarities, I think we are setting up for a very tough power cost somewhat overall hydro throughout the entire region is about 80% of normal.

Shar Pourreza

Got it. Perfect. Thank you. I appreciate the color. Thanks so much for Susan.

Operator

Paul Fremont, Ladenburg Thalmann.

Paul Fremont

I guess my first question has to do with some of the demand that you're seeing on the data center side, is that demand fully at this point incorporated into the IRPs that you've filed? Or do you see sort of incremental demand above what you're projecting?

Maria Pope

Sure. So as you know, we did our first ever of the plan and follow on IRP last year about this time last year, we filed a supplemental to that and took up the energy demand about 40% from what we were projecting previously after you look at the efficiency of combined technologies and what we were seeing from in some of the new deployments that we have, as well as how we're using the distribution system more effectively. And that came down to about 14% overall, but this a 40% increase in demand. It is a huge increase and it's certainly got everybody's attention. And I think that is absolutely what we're going to be probably as a floor on what we'll see as we move forward.
Just from a perspective of our industrial customer base, about 20% of our digital data center type customers, the real bulk of our industrial base is really actually semiconductors. And about 15% of semiconductors in the US are actually manufactured in our service territory. And most recently, the state of Oregon have created a matching fund to the chipset, about 240, 250,000,085% of the allocation of those funds because of specific companies are companies who have operations in our service territory, though we see new growth from not only from data centers but also from semiconductor manufacturers through the next decade that will probably only get higher, not lower.

Paul Fremont

Hi, great. And I guess the most likely period, if you were to settle in the rate case, would that be before hearings.

Maria Pope

No, look, I would imagine that we'll probably have a number of discussions and workshops with staff and parties, and we tried to settle before we ever get to a commission or order or whatnot as you know, we generally are pretty collaborative state as we work through issues. Obviously, customer prices has always been and will continue to be a major focus for us. And we've had some pretty big increases. So these conversations are going to be a challenge.
And then last question for me on can you just reiterate in terms of M&A and whether what the Company would be open to or not open to in the future potentially?
Sure, Kyle, as you know, we don't comment on any sorts of discussions along those lines, Tom, and we're not changing our policy.

Paul Fremont

Great. I think that's it for me. Thank you.

Operator

Gregg Orrill, UBS.

Gregg Orrill

Good morning. Thank you. So back to the drivers for the for the quarter, there were there was the management of power costs, wood, which it was a $0.17 benefit. How does that flow through or the pecan or where's where does the then P-Com stand?

Joseph Trpik

Have a good morning, Greg. It's Joe to add that, as you may recall, so the pecan has a deadband and asymmetric deadband of $15 million below before a sharing calculation is done or 30 million above where we sit currently. So during the quarter, really what we saw was VOD, the pretty productive management of cost in it also a stable market. We didn't see the volatility that we've seen in prior periods on gas prices, things like that. So we'll where we sit currently is we are 19 million below the PCAM baseline currently. Not part of that is due to the shaping of the way that the rates are set in the automatic adjustment tariff as as it as it goes through the year.
Here we've disclosed in the 1010 Q that we will be we think we'll be somewhere around. It will be the year of the edge of the baseline by the end of the year. But we do sit that $19 million paid for the baseline currently.

Gregg Orrill

Okay. Thanks, Joe.

Operator

(Operator Instructions) Willard Grainger, Mizuho Securities.

Willard Grainger

Hi, good morning, everybody. And maybe just one on if you can unpack for us a little bit understand those two buckets with costs associated with the January storms. You have the $75 million RC associated with the RC event and then a separate $48 million. Could you maybe talk to that, how are you thinking about the timing of the recovery of those dollars?

Joseph Trpik

Sure. Good morning. Well, as the reason that they are separate like that, and I'll talk to you as they are recovered under two, there are two different regulatory mechanisms that they're covered on. I'll start with the $75 million deferral. The $75 million deferral is is it are seeing deferral under the Pecem as it relates to the timing, that recovery will be assessed in a process that will go to mid 2025.
And we would expect currently that the recovery of whatever amount is settled in that process, which starting 2026. The reason I say expect the NDRC mechanism is new and the methods will be part of the recovery will be part of that discussion separately, we incurred $48 million in O&M and capital costs as it related to the physical restoration of the system during that storm period in Florida, there are are provisions that allow for the recovery of those costs. When a state of emergency is declared in the end, there's such damage that proceeding has started.
And after that, we're owed that cost proceeding has started, but if the time line is not set, so there's a filing made of there's a time line on underway. The if I had put an expectation at some period in 2025. Once it's settled, there would be a recovery. But right now, there's not a St. Close date for the preceding for me to be able to say what date that recovery would occur, nor do we have until the preceding end, what the time period of that recovery could be. It could be a short period are upticking several years based on what decisions are made.

Willard Grainger

Appreciate the color on. And then maybe one more on the extended day-ahead market proposal and to join the Cal ISO on would that allow you to get any sort of framework at our YA. or any sort of incremental transmission build to the capital plan? And maybe how should we be thinking about that? Thank you.

Maria Pope

Yes, it's a good question. And no, it would not. It's been a part of NIS., so there is no RTO. in the West and we're probably quite a ways off from that. If we ever do get to an RTO of the, it allows us to move from the energy imbalance market, which is essentially a real-time market to the day ahead, some. And there's some pretty significant customer benefits that we'll realize from that. But also some important operational benefits as we maximize the diverse renewable resources from the desert Southwest and extensive solar too, now the Pacific Northwest Hydro and all of the wind energy in between. So it allows for Bilia and have a more planful portfolio of and it builds upon the really good work that has already been done through the energy and balanced markets.

Operator

Thank you. I'm currently showing no further questions at this time. I'd like to hand the conference back over to Maria Pope, President and Chief Executive Officer, for closing remarks.

Maria Pope

Great. Thank you for joining us today. We appreciate your interest in Portland General, and we look forward to connecting with you soon. Thank you very much.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.