Tag Archives: oregon

Portland General: Utility With Some Promise

Summary Short-term, headwinds exist related to heavy capital expenditures and poor weather forecasts. Long-term, spending should be down and income up, freeing up cash flow for shareholder returns. Two natural gas-fired plant openings, one in 2016 and one in 2020, will be key to company success. Portland General Electric Company (NYSE: POR ) is an electric utility that operates wholly within the state of Oregon, providing power to nearly 50% of Oregonians with over 3,400MW of available energy generation. Primarily serving residential customers, the company’s bottom line has been bolstered by domestic migration to the Northwest. From 2010-2014, the Portland metropolitan area added over one hundred thousand new residents – an annual growth rate of 5.2%. This strong local population growth has helped bolster earnings results and shareholder returns, with investors reaping 100% in total return over the past five years, roughly double the return of utilities indexes. Does Portland General have more room to run or has the utility run its course? Future Is Natural Gas, Profit Is With Hydro * Portland General September 2015 Investor Presentation Portland General has a diverse portfolio of power generation. Including purchased power, 36% of power was created from renewable sources and an additional 25% generated from cleaner-burning natural gas. This is going to change drastically over the next few years, however. Given Oregon’s progressive nature, it wasn’t a surprise to see Oregon residents campaign for clean power. Management quickly bowed to customer and political pressure, leading to plans for the elimination of all coal-fired generation in Oregon. Under the Boardman 2020 plan, Portland General will close its 518MW Boardman coal asset by 2020, instead building a natural gas facility on the site. This will be a costly project, but doing so will save the company $470M in required upgrades to meet emissions guidelines had the plant remained open until 2040 as previously guided. The risk here is that the new plant is delayed and is not completed by the time Boardman is scheduled to be mothballed. Portland General relies heavily on the Boardman plant to produce electricity as coal-fired generation is in many cases the cheapest and most reliable asset the company has. Coal represents 16.5% of available resource capacity but generated 28% of the load in 2015 and is run at capacity nearly constantly. The company’s peak power load in 2014 was 3866MW which was already above currently available company-owned power generation and the shortfall from the Boardman plant closure could force Portland General to increase purchased power during peak times. While these costs will inevitably be passed along to the consumer because of Portland General’s clauses with the Public Utility Commission of Oregon, higher prices could still cause a slack in energy demand and bad press is never good for the bottom line. The company’s Carty Generating Station, slated to be completed in 2017, will help cover future shortfalls built is imperative for investors to track how the new Boardman facility’s construction is proceeding over the coming years. This risk is noted in the company’s 10-K: “Beyond 2018, PGE may need additional resources in order to meet the 2020 and 2025 RPS requirements and to replace energy from Boardman, which is scheduled to cease coal-fired operations in 2020. Additional post-2018 actions may also be needed to offset expiring power purchase agreements and to back-up variable energy resources, such as wind generation facilities. These actions are expected to be identified in a future IRP. PGE expects to file its next IRP with the OPUC in 2016.” – Portland General, 2014 Form 10-K From a profitability standpoint, the key to the company’s energy costs however is hydroelectricity. Hydroelectric generation can be the lowest cost source of generation for Portland General if conditions are right. The state of the Deschutes and Clackamas Rivers (tributaries of the Columbia River) is key. Both of these rivers’ headwaters are fed by the Cascades, a mountain range spanning from Canada to Northern California. In general, the greater the snowfall, the better the power generation is for hydroelectric when the spring thaw comes. Unfortunately for Portland General shareholders and highlighted in a recent prior SeekingAlpha article by Tristan Brown , weather models show lower than average snowfall likely for Oregon, along with a more mild winter in regards to temperature. This presents a double whammy for Portland General in the form of higher energy costs and lower revenue in the winter months during which customers typically draw around 10-15% more electricity than in the summer months. Past Operating Results (click to enlarge) Operating results have been steady and rather uneventful over the past five years (my own estimates used for the back half of 2015). Of note however is depreciation/amortization costs have been increasing dramatically due to the large capital investments the company has been making over the past five years, developing relatively more expensive wind/solar farms and the costs associated with the Carty Generating Station. Overall, this is steady-as-she-goes results that utility investors like to see. (click to enlarge) Frequent readers of my utilities research know that I look for solid coverage of capital expenditures and dividends from operating cash flow for mature utilities. Starting in 2013, Portland General reversed course and begun stepping up the leverage as capital expenditures rose for the natural gas plants at the Carty Generation Station and the old Boardman location. To fund this, Portland General issued $865M in long-term debt in 2013/2014 and also issued $67M worth of common stock in 2013 to cover the cash flow gaps. While this picture looks currently worrisome, it should moderate over time. Capital expenditures are expected to fall from the $600-650M range in 2015 to $289M in 2019, back to levels we saw in 2011/2012 when cash flow was positive. Unfortunately, Portland General won’t see much recovery in the form of increased rates because of offsetting factors, based on the overall breakdown of the 2016 rate case filing: (click to enlarge) Conclusion Portland General saw a little bit more renewed interest after the 7% dividend increase in 2015, well in excess of 2% annual growth from 2009-2014. In regards to operating income, however, 2016 looks unclear given the poor weather outlook. Earnings per share are likely to be flat to down in 2015/2016, so I would not expect a repeat of that hefty 2014 dividend increase. Before entering a position, I would like to see the valuation come down along with more visibility on completion of the two big natural gas facilities (early 2016 should give excellent insight into schedule on Carty Generation Station). Overall, however, shares are quite fairly valued given the long-term prospects of the region. Being long won’t hurt you.

Northwest Natural Gas’ (NWN) CEO Gregg Kantor on Q4 2014 Results – Earnings Call Transcript

Northwest Natural Gas Co. (NYSE: NWN ) Q4 2014 Earnings Conference Call February 27, 2015 11:00 AM ET Executives Robert Hess – IR Gregg Kantor – President and CEO Steve Feltz – SVP and CFO Analysts Derek Walker – Bank of America Operator Good morning, and welcome to the Northwest Natural Gas Company’s Fourth Quarter Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the conference over to Mr. Bob Hess. Please go ahead, Mr. Hess. Robert Hess Thank you, Dana. Good morning, everybody, and welcome to our fourth quarter and full year 2014 earnings call. As a reminder some of the things that will be said this morning contain forward-looking statements. They are based on management’s assumptions, which may or may not come true, and you should refer to the language at the end of our press release for the appropriate cautionary statements and also to our SEC filings for additional information. We do expect to file our 10-K later today. As mentioned, this teleconference is being recorded and will be available on our website following the call. Please note that these calls are designed for the financial community. If you are an individual investor and have questions, please contact me directly at area code 503-220-2388. Media please can contact, Melissa Moore at area code 503-220-2436. Speaking this morning are Gregg Kantor, President and Chief Executive Officer and Steve Feltz, Senior Vice President and Chief Financial Officer. Gregg and Steve have some opening remarks, and then will be available to answer your questions. Also joining us today are other members of our executive team, who will help answer any questions you may have. With that, let me turn it over to Gregg for his opening remarks. Gregg Kantor Thanks Bob. Good morning, everyone and welcome to fourth quarter and year-end review. I’ll begin today with an overview of 2014 and then turn it over to Steve to provide the financial details for the quarter and the year. I’ll wrap up the call with a look-forward. For Northwest Natural 2014 was a year of both opportunity and challenge. Last year our utility performance was solid, with improvements in customer growth and margin. However, those results were offset by losses associated with our gas cost sharing mechanism and the impact of natural gas prices. We also continued to see weakness in the California storage market hampering the financial returns from our Gill Ranch storage facility. In the midst to be varying factors, we delivered earnings of $2.16 per share and 2014 while providing a total shareholder return of approximately 22%. On the growth front, the Northwest economy made positive gains last year with Oregon’s employment rebounding to prerecession levels and unemployment rates continuing to fall. In 2014, we saw a healthy increase in commercial margins and an uptick in commercial new construction activity. The housing sector also improved with Portland home sales up nearly 4% and the average sale price up 7% last year compared to 2013. In addition, United Van Lines ranged Oregon its top moving destination last year, a positive indicator for future housing sector growth. And in Clark County in Washington, the fastest growing county in our service territory, home sales increased 8% with the average sale price increasing about 10%. These improvements help drive up our customer growth rate to 1.4% last year, and in the process we reached a new milestone adding our 700,000 customer. We believe last year’s healthy market improvements coupled with our substantial price advantage over electricity and oil put us in a strong position for additional customer growth going forward. In 2014 we made significant investments in safety and in reliability of our system. We completed several system reinforcement and facility upgrade projects and we continued our aggressive pipe replacement efforts. In fact we plan to remove the last three miles of bare steel pipe in 2015 making us one of the first utilities in the nation to eliminate both cast iron and bare steel pipe throughout our distribution system. In 2014, we reaped the advantages of having a more modern and robust system when extreme winter weather put us in the test. Last February we set a company record with a send out volume hitting 9 million firms in a 24 hour period. That’s almost double the normal send out for a typical winter day. And I’m pleased to report our pipeline system and storage facilities performed very well. I’m also pleased to report that for the fifth time in eight years we ranked first in the west in the annual J. D. Power Gas Utility Residential Customer Satisfaction Study. Last year also marks the seventh time in eight years that we were among the two highest scoring gas utilities in the nation. Now let me shift to the status of our regulatory agenda. Last year we continued to work through three remaining dockets carried over from our 2012 Oregon rate case. Just last week the OPUC issued its decision regarding how the Company’s environmental site remediation and recovery mechanism would be implemented. In the final order the commission found that all but $33,000 of the $114 million of environment remediation expenses incurred from 2003 through March of 2014 were proved. However due to the application of an earnings test from 2003 through 2012 the OPUC disallowed recovery of expenses totaling $15 million. At the same time the order specifies that insured settlements totaling over $150 million were entered into prudently by the Company. Steve will provide more details on how the mechanism works but let me just say that while the write down is disappointing we view our ability to fully recover future environmental cleanup cost as the key issue in a very complex and tough docket and we’re pleased the environmental spend and insurance settlements were deemed prudent. We do have some questions and implementation issues that we will be working on with the commission, but overall we believe the order provides us with a reasonable path forward. We expect the last two proceedings from our 2012 rate case to also be decided on this year. These are the interstate storage sharing and pension dockets. As you know, last year we amended our gas reserves agreement with Encana in response to their sale of the Jonah field. While the new arrangement ended the original drilling program, it also increased our working interest in Jonah and allows us to continue to invest in the field on a well by well basis. Under the new agreement, in 2014 we invested in seven wells and yesterday we filed with the OPUC to recover those costs as part of our utility hedge portfolio. A final important regulatory milestone last year was the filing of our integrated resource plan in Oregon and Washington. The plan covers a variety of issues associated with our ability to serve customers, including the need for additional system investments in Clark County, Washington and at our Newport LNG plant in Oregon. Just a few days ago we received acknowledgement on the IRP from the Oregon commission and we expect to receive notification from the Washington commission by this summer. With that let me turn it over to Steve. Steve Feltz Thank you, Gregg and good morning everyone. In 2014 we made significant progress on a number of fronts, including operational improvements and some important long term growth initiatives in both the utility and gas storage businesses. Additionally as you’ve heard earlier we received an order from the OPUC on how we would recover future environmental costs, which was a significant financial issue carried over from our last rate case in 2012. I’ll talk more about the financial implications of that order later on. But first let me turn your attention to 2014 results. Earnings for the fourth quarter were $1.04 per share on net income of $28.5 million. That was down slightly from $1.07 per share on $29 million a year ago. Results for the quarter reflect an increase in utility earnings largely due to higher margin and lower operating and maintenance expense. The utility increase was more than offset by a decrease from our gas storage segment which was driven by the re-contracting of Gill Ranch capacity at lower prices due to the depressed market conditions in California. The utility realized margin gains despite significantly warmer weather and lower customer usage. During the quarter, temperatures were 25% warmer than average and delivered volumes were down 13% compared to a year ago. The steady margin gains from our utility reflect our consistent customer growth and the effectiveness of our weather normalization and decoupling mechanisms. Now turning to full year results, consolidated earnings were $2.16 per share on net income of $58.7 million in 2014, as compared to $2.24 per share on $60.5 million a year ago. From the utility, net income for 2014 was $58.6 million, up from $54.9 million a year ago. A $12 million increase in margin was driven by customer growth, incremental use by commercial customers on higher margin rate schedules and added rate base recovery from new investments. These margin gains more than offset the impact of weather, a $2.1 million loss from our regulatory gas cost incentive sharing mechanism in Oregon and a $3.2 million increase in depreciation expense. From an operational standpoint, total gas delivery by the utility decreased 5% to 1.09 billion terms. The decrease was largely driven by 13% warmer than average weather and by declining average use for the customer. Despite the 5% decrease in volumes, utility margin increased by more than 3% over last year, including adjustments totaling $19 million from our weather normalization and decoupling mechanisms in Oregon. From our gas storage segment, net income in 2014 was a loss of $400,000, as compared to a gain of $5.6 million a year ago. The $6 million decrease in storage net income primarily reflect an $8.9 million decrease in operating revenues and a $1.8 million increase in operating expenses. As mentioned earlier, the decline in storage revenues was largely tied to lower prices at our Gill Ranch facility in California. Meanwhile, operating expenses at that facility increased, partly due to higher power cost for storage resale following significant withdrawals from last year and higher repair cost. Recently we’ve seen some improvement in summer-winter spreads for the upcoming storage year and because we have short-term contracts for a majority for our capacity, we should realize slightly higher prices in California this year compared to last year. But despite this improvement, we expect continuing challenges in 2015 as current storage values remain lower than the pricing on our original multi-year contract. With regard to operating expenses, for the quarter our O&M costs were 8% or $3.1 million lower than the same period last year. On a full year basis, O&M increased by less than 1% compared to a year ago. The year-over-year increase was mostly attributed to the previously mentioned higher power and repair cost at Gill Ranch, but that was largely offset by lower payroll and other cost savings at the utility. Cash provided by operations during 2014 was $216 million, up from $176 million in 2013. The main differences from year ago were the receipt of $103 million from insurance proceeds partly offset by increases in the deferred gas cost due to higher prices and other changes to working capital accounts. The insurance proceeds in particular helped to improve our liquidity position. With respect to our gas reserves program, we invested $27 million in 2014. Of that total $10 million was under the new amended ownership agreement with Jonah Energy, which we refer to as our post carry well. We recently filed with the OPUC a request to recover the revenue requirement associated with the post carry wells, thereby adding these gas reserves to our utility gas hedge portfolio. Our investment in gas reserves, both from the original contract with Encana and under the new agreement with Jonah Energy totaled $187 million since inception. Before providing earnings guidance for 2015, I’d like to explain some of the financial impacts of the recently issued regulatory order on the recovery of past and future environmental costs. First, the order results in an immediate onetime $15 million pre-tax charge for past environmental costs which we’ll record in the first quarter of 2015. The Oregon commission disallowed this amount based on its determination of how an earnings test should apply to past years from 2003 through 2012. As part of its review, the commission ruled that all but $33,000 of the $114 million in total cost through March 2014 or were deemed to be prudently incurred. Second, the commission ordered that the insurance proceeds received by the Company which amount to about $150 million in total be allocated to past and future costs with one-third of the total supplied for the recovery of past costs through December 2012. The remaining two-thirds would be placed into a secure account earning interest with those amount supplied for the recovery of future cost. In the order, the commission also concluded that all insurance settlement entered into by the Company through March of 2014 for were deemed prudent. After applying roughly $50 million of insurance proceeds towards past costs and deducting the $15 million disallowance, the commission order allows for full recovery of the remaining balance of past cost through 2012, which amount to roughly $30 million. The $30 million of past cost will go into the recovery mechanism which allows for these costs to be collected from customers over a rolling five year amortization period beginning this year. In addition to recovery in our past cost from customers and insurance, the commission also ordered the full recovery of future environmental cost as follows. First, the company will recover the first $5 million each year from customers through a tariff writer effective 2013. The Company will then apply an additional $5 million from the insurance account plus interest accrued on the account during the year to the next portion of environmental cost also effective 2013. If our environmental costs are less than $10 million plus interest, then any unused insurance will roll forward into the next year. If however our annual environment costs exceed the $10 million plus any insurance roll forward from the prior year then the excess will be fully revered through the environmental recovery mechanism. However if the Company earns above its authorized ROE, then the Company would be required to use the amount of earnings above its ROE to cover environmental expenses greater than the $10 million plus any insurance roll forward. In effect the company is provided full recovery of its environmental cost going forward. Today the Company is initiating its 2015 earnings guidance in the range of $1.77 to $1.97 per share for 2015. After adjusting for the one-time $15 million pretax charge previously discussed our earnings guidance for 2015 is $2.10 to $2.30 per share. The Company’s 2015 guidance assumes customer growth from our Utility segment, average weather conditions, slow recovery of the gas storage market in California and no significant changes in prevailing legislative and regulatory policies or outcomes. With that I’ll turn the call back over to Gregg for his concluding remarks. Gregg Kantor Thanks Steve. In 2014 our utility performance was solid with improvements in customer growth and added rate based returns on gas reserves and other system investments. We also made progress on our other growth initiatives. Earlier this month we received approval from Portland General Electric to move forward with the permitting demand acquisition work required for a potential expansion project at Mist, our underground gas storage facility. The project would be designed to provide no notice storage services to PGE’s natural gas bio-generating plants at Port Westward in Oregon. The potential expansion would include a new reservoir providing up to 2.5 billion cubic feet of available storage, an additional compressor station with design capacity of 120,000 dekatherms of gas per day and a 13 mile pipeline to connect the PGE’s gas plants at Port Westward. In 2015 our team will be working to obtain all the required permits and certain property rights and assuming successful completion of those necessary elements the current estimated cost of the expansion is approximately $125,000 million with a potential in service date in the 2018, 2019 winter season, depending on I should say the permitting process in construction schedule. As you may recall Oregon passed a bill effective last year that allows the OPUC to incent natural gas utilities to undertake projects that will reduce greenhouse gas emissions. We view this legislation as an exciting opportunity to make a positive environmental impact while potentially serving our customers and communities in new ways. In 2014 we worked through a rulemaking effort with the OPUC staff and customer advocates rules for what we are referring to as the carbon solutions program were then passed by the Oregon Commission this past December. In parallel to that rulemaking effort last year we began assessing a number of possible projects spanning several areas. Examples of potential projects involve reducing methane emissions during pipeline maintenance and repair, residential oil conversion program and distributed generation projects that use natural gas to increase energy efficiency. At this point, we are refining concepts and meeting with interested stakeholders to discuss our ideas, including the OPUC staff, customer advocates and energy efficiency groups. Our goal this year is to file several projects with the Oregon Commission to consider and hopefully to approve. In my view the carbon solutions program offers an excellent opportunity for us to demonstrate our spirit of innovation to showcase the important role natural gas can play in helping our region meet its environmental goals and add to the Company’s bottom line. In the months ahead we intend to make progress in a number of areas as I’ve said, continuing to grow our utility customer base, completing the last two remaining dockets from our 2012 rate case proceedings, advancing the north Mist expansion project, and doing all of this while continuing to provide safe and reliable service to our customers. Thanks again for joining us this morning and now I’d be happy to open it up for questions. Question-and-Answer Session Operator We will now begin the question-and-answer session (Operator Instructions). Gregg Kantor It’s hard to believe we were that clear on all of this stuff, but it doesn’t appear there are any questions. We’ll wait another few seconds here. Operator Our first question is from Derek Walker of Bank of America. Mr. Walker? Derek Walker Just I appreciate the color going through the order on the environmental piece here. Just a quick follow-up and there was a lot of nuances to it about conditions associated with it, but I think in general in the past or at least at times you’ve been able to achieve little bit above sort of allowed ROE, but does this new mechanism effectively to limit your ability to go slightly above that, the 9.5%? Gregg Kantor It does in those instances where we spend more than what is in the in the tariff writer and the insurance. So we’re spending more than that amount, which is $10 million, it will limit going above our allowed return on equity. Derek Walker And as far as the — just given on the commodity backdrop, as far as additional wells being drilled is there — I guess what you’re seeing on that development side? Gregg Kantor Well, as I said in the remarks we do have the ability to drill on a well-by-well basis. But the way that works though is that Jonah Energy Inc. proposes wells to us and then we get to evaluate and make a decision about on a well-by-well basis whether we’re going to proceed with those wells. Right now there haven’t been any proposed to us, not exactly certain if there will be this year and again we take them on a well-by-well basis. I don’t expect that there will be — even if they do propose wells that they will be large. Again last year there were 10 that were proposed to us. So I don’t think that’s going to be a very large amount if there are wells proposed. The other part of it is that we continue to look at a second overall gas reserve deal as part of a discussion we’re having with the commission on what’s the right amount of gas reserves to have. We call that our hedging docket which was — is going to be open this year and hopefully completed this year and that will tell us whether we’ve got the right amount of gas reserves in our portfolio or not and hopefully we’ll get through that this year and it will give us some direction on a future deal. Maybe just a little bit more follow-up on the first part of your question Derek, which was about over earning, it does in most cases where we’re as I said spending more than $10 million, prevent us from over earning in those years. But I would also say that the important part of this docket I kind of want to underscore was the costs of this are large for the company in the future and our goal here was to make sure we got full recovery and the order does do that and we really believe that this is a very reasonable path forward for us. Operator (Operator Instructions). Gregg Kantor Well, if there are no other questions, thank you all for joining us this morning. We really appreciate your interest in our Company and look forward to seeing you down the road. Thanks. Operator The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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