Distribution Solutions Group Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 28, 2023

There are 9 speakers on the call.

Operator

Morning, everyone, and welcome to Portland General Electric Company's First Quarter 2023 Earnings Results Conference Call. Today is Friday, April 23, 2023. This call is being recorded and as such, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you do not intend to ask questions, please avoid using the speakerphone.

Operator

For opening remarks, I will turn the conference over to Portland General Electric Senior Director of Finance, Investor Relations and Risk Management, Jardan Jaramillo. Please go ahead, sir.

Speaker 1

Thank you, Valerie. 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 will be referencing throughout the call. The slides are available on our website at investors.

Speaker 1

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 ks and 10 Q, which are available on our website. Leading our discussion today are Maria Pope, President and CEO and Jim Michelo, Senior Vice President of Finance, CFO, Treasurer and CCO.

Speaker 1

Following their prepared remarks, we will open the line for your questions. Now, it is my pleasure to turn the call over to Rovian.

Speaker 2

Thank you, Jonathan, and good morning. Thank you all for joining us today. Beginning with Slide 4, I'll start by discussing our Q1 results and speak to the key drivers. For the Q1, we reported GAAP net income of $74,000,000 or $0.80 per diluted share. This compares with 1st quarter 2022 GAAP net income of $60,000,000 or $0.67 per share or non GAAP net income of $72,000,000 or $0.81 per share.

Speaker 2

There are 3 primary drivers of our results this quarter. 1st, We continue to see good load growth. Industrial loads in particular increased over 8% quarter over quarter as high-tech sectors and steady expansion and the region continued. 2nd, our power costs have increased both as a result of load growth as well as higher natural gas and power prices. And third, cost management remains a key priority and we expect largely flat O and M for the full year, excluding the impact of wildfire and major deferrals as was the case this quarter.

Speaker 2

In addition, our Q1 results reflect the impact of a $300,000,000 draw from our equity forward, which was completed on March 1. This draw is an important step for our ongoing clean energy investment and in resetting our balance sheet for growth ahead. 2023 earnings is forecast to be in the range of 2 point $0.60 to $2.75 per share and we remain confident in our long term earnings growth rate of 5% to 7%, driven by strong load growth and customer growth as well as attractive capital investment profile and improved operational performance. Moving to Slide 5. As you know, we've been focused on bringing on new renewable and non emitting resources onto our system, and we're excited to announce the acquisition of a company owned battery storage project as part of our most recent RFP.

Speaker 2

Seaside Grid, a 200 Megawatt facility, will total approximately $360,000,000 of investment, excluding AFUDC, and is expected to begin service by mid year 2025. We're also announcing an additional 200,000,000 Battery storage from the Troutdale Grid Facility, developed and owned by NextEra Energy Resources, to LaSalle capacity under a 20 year storage capacity agreement. This project is expected to begin service by year end 2024. We continue to negotiate with a remaining shortlist bidder for a 75 Megawatt company owned battery storage project and expect negotiations to be finalized in the first half of twenty twenty three. Negotiations for this project represent the final chapter of the 2021 RFP.

Speaker 2

These new Oregon based projects are significant additions to our existing capital clean energy portfolio and provide grid reliability, resiliency and flexibility. This will help us manage energy costs, allowing us to deploy stored renewable energy during times of peak demand, partially offsetting market energy purchases. Associated with wind, solar and hydro generation. These battery projects will be an important component and integrate future renewable resources. To finance the Seaside project and other capital needs, We will use a combination of debt and equity and have registered a $300,000,000 at the market shelf offering to allow incremental equity issuances.

Speaker 2

Jim will expand on this in his remarks. On the regulatory front, we filed inaugural Clean Energy Plan in conjunction with our 2023 Integrated Resource Plan. Net of today's battery announcements, These integrated documents outline the 2300 megawatts to 3,300 megawatts needed to meet our future resource needs by 2,030. Also in the Q1, we filed our 2024 general ratings and have recently established the procedural schedule for the year. The rate case increase has 3 main components.

Speaker 2

1st, 30% as a result of natural gas and purchased energy prices 2nd, 40% related to capital investment And finally, 3rd, the balance is due to higher O and M costs associated with compliance and inflation. This rate case also addresses our Power Cost Adjustment Mechanism or PCAM to facilitate Oregon's decarbonization goals and better reflect current and future operating conditions. We are still in the early stages of this case and look forward to collaborative discussions with the OQC and stakeholders. We expect to conclude all deferral dockets following resolution of the 2020 Boardman revenue requirement deferral, which we expect to be concluded in the 2nd quarter. We're very pleased that securitization legislation is moving through the Oregon legislature and expect it to be signed into law later this year.

Speaker 2

If passed, this legislation can help limit customer price impacts from major events. Affordability is essential with significant inflationary pressures and energy price volatility. I commend our PGE colleagues who are incredibly focused on controlling costs. As I discussed last quarter, in 2022, We made progress streamlining our work processes, leveraging technology and improving productivity. And throughout 2023, We have a lot more work to do and are building on the work we have done over the last several years.

Speaker 2

For example, we're investing in digital tools to enable operational efficiencies, better resource deployment and improve customer service. In fact, our upgraded Kyle based customer system was deployed seamlessly just 2 weeks ago. Our customer information and meter data management system is making it easier for customers to get accurate and timely information and for our teams to execute more coordinated and timely customer service response. Another great example is the implementation of new management and scheduling technologies, which are helping us to more efficiently manage our crews, workflows and field tools, both increasing cost efficiency and reducing cybersecurity risks. With this focus and these improvements, we will continue to target largely flat O and M when compared to prior year.

Speaker 2

Excluding the impact of major deferral amortizations and higher wildfire costs. We also strengthened our organization with the appointment of Ben Feltman as our new Chief Operating Officer. Ben joins us from DTE, where he most recently served as Senior Vice President of Energy Penn brings a wealth of experience built over 30 years across just about every aspect of utility operations and deep knowledge of the industry. We have experienced tremendous growth over the last several years and our operations are increasingly complex. As we look ahead, we expect that our business and operating environment will only become more dynamic and interconnected, Bringing a COO of Ben's caliber to PGE provides an opportunity to unite several groups, including Engineering, Construction and Operations.

Speaker 2

Following our 2023 Annual Meeting of Shareholders, I'm also pleased to share that Jim Torgerson has been appointed Chair of our Board of Directors. Jim has served on the PG Board since 2021 and has Extensive knowledge of the utility industry and power markets, including Renewable Energy Development, Finance, Regulation and Risk Management. I would like to thank Jack Davis and Rod Brown, who are concluding their Board service. Their Wise Counsel and Vision have helped guide PGE for a combined 25 years. We have greatly benefited from Jack Davis, who was our Chair of our Board for a number of years and who has deep industry knowledge as well as Rod's experience in environmental law.

Speaker 2

And then on a final organizational change, You may have seen the release that we issued this morning announcing that Jim Adel has decided to retire. Jim came to us in 2020 when the company needed a steady hand to lead our financial organization. He helped us implement new risk and financial management practices, strengthen our financial foundation and accelerate our clean energy transition. Today, in no small part and thanks to his leadership, we are executing on a refocused strategy, identifying new ways to operate more efficiently and continuing to improve our reliability and resource adequacy. Among Jim's many accomplishments, I'm especially thankful for his leadership In resetting our balance sheet, we completed a $500,000,000 equity issuance last fall, lost $300,000,000 at the market our program today and have raised nearly $1,000,000,000 in debt and expanded our bank lines of credit and insurance programs.

Speaker 2

All of this supports higher levels of Clean Energy Investments, reliability improvements, as well as Smart Grid Transformation, positioning us for growth and superior customer service for many years to come. We are currently conducting a search for Jim's replacement, including internal and external candidates. To ensure a smooth transition, Jim has agreed to remain as a senior advisor through the end of August after he transitions from his current role at the end of June. Jim, thank you. You've made a remarkable difference during your tenure and we're enormously grateful.

Speaker 2

Now before I turn it over to Jim, I'll close from where I began. Overall, we had a good quarter. We made significant progress to strengthen our organization and accelerate decarbonization and reliability of our energy supply through battery projects announced today. With a clear line of sight to accelerated growth and value creation, we remain focused on providing safe, Reliable, affordable, clean energy to all customers. And with that, Jim will walk you through our financial results.

Speaker 2

Thank you.

Speaker 3

Thank you, Maria, and good

Speaker 4

morning, everyone. I'll cover our Q1 results before providing additional details on resource planning, Capital Investment and Liquidity and Financing Outlook. Moving to slide 6, our first quarter results reflect sustained demand growth, Effective management of continued power market volatility and successful execution of our long standing cost management efforts. Our regional economy remains solid as unemployment in our service territory held at 3.8% Through Q1 2023, development and demand amongst our industrial customer class has remained strong. We continue to see a strong pipeline of industrial customer projects, particularly high-tech and data center sites ramping in the coming months.

Speaker 4

Overall, Q1 2023 loads increased by 1.9% weather adjusted compared to Q1 2022. On a non weather adjusted basis, total load increased 4.7% year over year as we witnessed a 9.4% increase and heating degree days. Residential load increased by 5% year over year, but decreased 0.9% weather adjusted, which speaks to both cold weather in our service territory and the continuation of usage patterns as our customer practices normalize In the aftermath of the pandemic, residential customer count growth increased 0.9% compared to Q1 2022. Commercial load increased 1.2% year over year or 0.4% weather adjusted as commercial activity also continues to normalize. Industrial load growth remained steady in Q1, growing 8.6% or 8.3% weather adjusted with high-tech and digital customers continuing to lead the segment.

Speaker 4

While we did see higher deliveries driven by colder than typical weather temperatures, we also saw a continuation of higher power prices. Execution of our operational and risk management strategies helped dampen the impact of this weather volatility as intended. These conditions emphasize the resource constraints in our region and changing market dynamics that require continued collaboration among our employees, customers and regulators to address market driven challenges. I'll now cover our financial performance Quarter over quarter. We experienced a 0.22 dollars increase in total revenues driven by the 4.7% increase in deliveries, led by continued growth amongst our industrial customer class.

Speaker 4

We saw a $0.05 increase in revenues due to customer Composition differences quarter over quarter, driven primarily by weather, driven increases in residential and commercial loads compared to 2022. Higher power prices due to higher purchase volumes to serve load during a particularly cold Q1 of an $0.08 EPS decrease. Increases in average market prices during the quarter drove an $0.18 decrease. We saw a $0.04 impact from depreciation and amortization expense, including $0.01 due to higher plant balances year over year and $0.03 due to capital cost deferrals 2022 that did not recur. There was a $0.05 decrease from the impact of higher interest expenses due to higher long term debt balances, Q4 2022 1st mortgage bond issuances totaling $200,000,000 and a $260,000,000 term loan issued in the 4th quarter, which was repaid in March.

Speaker 4

There was a $0.04 increase due to higher returns on non qualified benefit trust assets reflecting improved market conditions compared to Q1, 2022. A $0.02 increase from higher AFUDC compared to 2022, reflecting our continued growth in grid and technology investments. There was a $0.03 decrease due to the dilutive impacts of the $300,000,000 equity draw completed in the Q1. Lastly, we had a $0.04 increase from other items, including higher miscellaneous income, partially offset by higher property taxes. Much of our results this quarter reflect our trend towards sustained growth with higher depreciation from increased capital investment, interest expense to fund new capital projects and near term dilution impacts being key drivers.

Speaker 4

This is an incremental $0.12 year over year. As we have mentioned on previous calls, 2023 remains an investment year and we remain focused on execution that strengthens PGE's foundation for long term growth and value. On Slide 7 for an update of the 2021 RFP. As Maria highlighted, We are pleased to have another addition to our portfolio that will allow us to maintain reliability for customers, provide flexibility to our grid operations to meet changing conditions to help us manage power costs on behalf of customers. The 200 Megawatt of company owned battery storage and 200 megawatt of incremental capacity secured under a capacity storage agreement is a critical component PGE's clean energy future and will enable quick deployment to serve customers during extreme weather events or periods of high demand.

Speaker 4

Combined with 3 11 Megawatt Clearwater Wind Development announced in late 2022, of which PGE will own 208 Megawatts, The company will invest $775,000,000 in new renewable and dispatchable capacity resources procured to date. Maria mentioned, we continue negotiations on a PGE owned 75 Megawatt battery project, and we are optimistic that we'll enter an agreement in Q2. If an agreement is reached on this final project, PGE Willow procured company owned projects with nameplate capacity of 483 Megawatts resulting from this Competitive procurement cycle. Other parties in the process garnered a total of 303 megawatts of nameplate capacity. In total, we will have secured 7 86 megawatts of renewable generation and non emitting capacity resources with PGE owning 61 percent of the capacity procured from this highly competitive RFP.

Speaker 4

This combination of owned and contracted resources and a mix of technologies allows us to achieve a balance of cost and risk of projects that will provide optimal long term benefits to customers. Even while navigating notable macroeconomic challenges, We were able to achieve many of the procurement targets placed on us at the outset of the RFP and made critical progress in our clean energy journey. And I strongly believe we got the best outcomes for our customers. In the wake of our combined CEP and IRP's filing made in late March. We anticipate issuing the 2023 RFP in mid-twenty 23 and final project selections anticipated in 2024.

Speaker 4

Turning to Slide 8, which shows our updated capital forecast through 2027. Our 2023 through 2025 CapEx guidance is increasing by 115,000,000 $180,000,000 $210,000,000 in each respective year, primarily due to investments in the new Seaside project. This does not include any CapEx that would be associated with the 75 Megawatt project still in negotiations. Like Clearwater, the agreement for the Seaside project utilizes a build transfer approach, which provides an ideal mix of risk mitigation And financing flexibility. As a reminder, figures presented here do not include any potential expenditures related to the possible ownership from the remaining portion of the current RFP or future RFP cycles.

Speaker 4

Turning to Slide 9, we continue to maintain our strong balance sheet and liquidity as well as investment grade credit ratings, accompanied by a strong credit outlook. Total available liquidity at March 31, 2023 is $679,000,000 which does not include underarm portions from the existing Equity Forward or the newly filed ATM. We issued $300,000,000 of common equity under the existing Equity Forward sales agreement in March. Remaining draws against the Equity Forward are expected to be completed by the end of the agreement's 24 month term. Looking to the balance of 2023, we anticipate debt issuances of up to $300,000,000 which we plan to issue under our green financing framework to continue our practices of tying debt financing to our sustainability strategy with capital investments.

Speaker 4

We also registered a $300,000,000 at the market shelf offering today. The ATM incorporates a forward component to match spending needs and provide improved optionality for increased equity offerings to support our upcoming clean investments. We intend to finance new CapEx in line with our fifty-fifty authorized capital structure. Any use of the ATM will be strategically timed to fund capital investments when conditions are optimal. This strategy will help us attract capital at competitive prices for the benefit of our customers.

Speaker 4

We will continue to manage dilution carefully as we aim to align equity issuances with cash payments for rate based investments where possible. In terms of our 2023 outlook, our Q1 results reflect The continuing strength in our fundamentals in the service territory as well as our consistent operational execution. We remain laser focused on cost management and thoughtful investment in high return activities that drive more effective and efficient operation. And we look forward to additional deployments that will yield strong results for our customers and shareholders. We also maintain our confidence In 2023 load growth, led by sustained growth from high-tech and digital industrial customers and modest growth from residential and commercial customers.

Speaker 4

Combined, we still anticipate weather adjusted load growth of 2.5% to 3%. With respect to dividends, last week our Board approved a dividend increase of $0.09 per share on an annualized basis, which represents a 5% increase. This increase is consistent with our long term dividend growth guidance of 5% to 7%, while observing a dividend payout ratio target of 60% to 70% over time. As I highlighted previously, Our service territory fundamentals, improved operating performance and attractive capital investment profile will allow us to achieve our long term earnings growth guidance of 5% to 7%. As we reflect on the Q1 and turn towards the remainder of 'twenty three and beyond, our foundation for growth is robust.

Speaker 4

We look forward to executing on our long term financial goals and providing value to our customers and shareholders alike by delivering safe, affordable, Reliable and Increasingly Clean Energy. As a result of these factors, we are reaffirming our full year adjusted earnings guidance of $2.60 to $2.75 per diluted share. Before we open the line for questions, I want to thank you, Maria, And the great team and the Board at PGE for this opportunity to work so closely together. It's been an honor and a privilege. It will be a very bittersweet moment for me when I leave 4 months from now, and I would do everything I can to help continue our momentum and affect the smooth transition.

Speaker 4

But between now and then we have plenty of work to do. And now operator, we're ready for questions.

Operator

Thank you. Our first question comes from Shahriar Pourreza of Guggenheim. Your line is open.

Speaker 5

Hey, good morning guys. Good morning. Good morning. Just starting with the remainder of the 2021 RFP, is the implied capital cost For Seaside, a useful proxy for that smaller 75 megawatt opportunity. And secondly, what's the timeline for that?

Speaker 5

Do we have to wait for The 2Q call or could we get an 8 ks between now and then? Thanks.

Speaker 4

Hey, Shar, it's Jim.

Speaker 6

I'll

Speaker 4

take that one. So the final project, the 75 Megawatt project is still under negotiation. So I won't cite an exact capital cost because we're Still finalizing that. But if you look at the totality of the 2021 RFP results to date, It's been pretty much coming in as we expected about $1900 $2,000 a kw of installed capacity. Since we have really good current pricing from very similar storage projects, I think you can extrapolate pretty easily What that project could come in at.

Speaker 4

But until that contract is signed and inked, we have an agreement on the actual capital cost. We'll have to extrapolate, but I think it's pretty easy right now.

Speaker 5

Got it. And then you guys propose to modify the PKM in the case, realize it's Early innings, but maybe at a high level, is this something we could see parts of get through or is it an all or nothing process? I guess put differently, Could we see changes to the sharing ratios, but not removal of the deadbands? Just trying to understand what the pathways forward are here. Thanks.

Speaker 2

Sure. So first of all, I think it's too early to speculate where we'll end up. But there are proposed changes to the PKAM represent pretty significant changes to the power markets as well as to reliability. So when we look towards The Western Resource Adequacy Program, we work to look at how power markets are operating today. It's time to update and bring To date, really, these mechanisms that we've had in place for a long time.

Speaker 2

So, it's an important set of changes, not only for the company, but also for the customers, and we look forward to working collaboratively with parties.

Speaker 5

Perfect. That was all the questions I had. Jim congrats on sort of Phase 2 of your retirement. I think you're obviously a little too young to retire. You're too young to retire, but we'll discuss that over drinks.

Speaker 5

Thanks guys.

Speaker 2

Thanks, Cheryl. Thank you.

Operator

Thank you. One moment, please. Our next question comes from the line of Julien Dumoulin Smith of Bank of America. Your line is open.

Speaker 7

Hey, good morning, team. Thank you for the time. Hey, thank you, Maria. And Jim, saying excel, I wish you the best of luck. I'm sure I'll see you more around here.

Speaker 7

And Ben, best of luck to you.

Speaker 5

It's a pleasure.

Speaker 7

Indeed. Just following up here quickly on the ATM, I saw the $300,000,000 How do you think about the timing related to that? I But obviously, you've got a lot a pretty steady cadence of potential CapEx revisions higher here, Such that you could really need further capital revisions and further capital injections later. How do you think about sort of

Speaker 4

the cadence of the new equity Ray, is here you go. Yes, good question. So let's go back to basics from the October offering, right? $500,000,000 and part of the proceeds there was to reduce debt. So we dramatically improved our Ratios and the like, about I would say about $300,000,000 out of that $500,000,000 offering Address the balance sheet and closing the quarter here, we're getting close to 49% equity.

Speaker 4

So mission accomplished, right? And then we had a little more than a $400,000,000 investment in Clearwater. And so therefore, a couple of $100,000,000 is So between the balance sheet and Clearwater, those proceeds are being applied towards progress payments and the like and strengthening the financial With respect to the new projects going forward, they're very substantial Equity Investments and frankly looking ahead to closing out the project that we haven't signed yet, Pretty much going to size that ATM to capitalize these new projects going forward, including The debt that we'll issue towards the end of this year in the second half, I would say. So that will help us as we go. The ATM will last us through the termination period of the registration statement, which is August 2 years hence, so a little more than 2 years to go there.

Speaker 4

And of course, the Equity Forward is a 2 year arrangement. So, I think we're well set up between these two transactions to capitalize everything that we need, including having fixed the balance sheet and the strong prospect of this final 75 Megawatt storage project. So you're quite right in the implication. We need a lot of financing, but we're now set up to do that. And of course, I'd like to go into the 2023 RFP seeking projects in 2024 with a little bit of Tailwind, so we can confidently bid on those projects as well.

Speaker 7

Right. And Jim, if you can clarify this, I mean, I know the 2 year forward structure, but as you say, you've already sort of allocated the equity you raised last fall. I mean, is the dilutive impact as you think about this spread out over tiers or do you think that this is more concentrated on the front end of It

Speaker 4

will definitely be spread out over a couple of years. And the reason being is that The way we're going to fund these projects is based on progress payments as these projects are delivered with milestones to us. So on a quarterly basis, these company owned projects will require progress payments to the contractors and vendors that we have that are delivering them. So there's a schedule of these things and then we'll be drawing against the equity and debt that we have To pay those bills, plus don't forget another $800,000,000 of kind of base capital That's inherent in the plan. So with this year's $1,300,000,000 in next year's increasing guidance, We have a very substantial capital plan here that's running, call it, 3 times appreciation.

Speaker 7

Excellent. And just two quick clarifications, if I can, related to, 1st, industrial loads still intact, Not seeing any pullback from the tech side of the equation. Just want to clarify that. Obviously, you guys have Intel and others in your service territory. And then related here, percent expectation on the win for future RFPs, I mean, you guys won a pretty hefty amount here, pro form a for that last project.

Speaker 7

Still confident about what that means for future RFPs?

Speaker 4

So on the first point, I see, we see load growth in the industrial sector proceeding along at mid to high single digits As we go. And I'm sure Maria will comment in a minute. And then quickly on the second question, yes, I cited 61% Win rate on this last RFP, but I really can't speculate on the go forward. It's just too soon to tell. We haven't even issued the RFP yet.

Speaker 4

So standby for that.

Speaker 2

Julien, on the load side, we continue to see load growth really across the board. Our migration continues. Customer count was up just slightly shy of 1% in the Q1, and that's the winter quarter. We also continue to see commercial come up while residential is down a little bit in terms of usage. As that reflecting people really back to work and post COVID environment.

Speaker 2

And for The last several quarters really the story is all about industrial growth. And we have about 15% of the semiconductors that In this country are manufactured in our service territories. So there are many of those manufacturers who are adding to their current facilities and expanding. In addition to what you see across many aspects of the country, which is digital and cloud computing organizations expanding their operations.

Speaker 4

Data centers in this neighborhood are going to generate demand for 150 megawatts of new load this year alone, Just as an example.

Operator

Thank you. One moment please. Our next question comes from the line of Sophie Karp of Key. Your line is open.

Speaker 8

Hi, good morning. Thanks for the time. And Jim, you will be greatly missed when you

Speaker 5

Thank you

Speaker 2

so much.

Speaker 8

Anyway, a couple of questions I have here. So In the PKAN request, I was wondering if you can remind us the regulatory history of this, So specifically, if you requested in the past to have it modified and what the outcome was, sort of trying to glean how much appetite the stakeholders might have for The modification of this loan entrenched mechanism.

Speaker 2

Sure. That's a great question. And first of all, we've had This mechanism in place even before I joined the company. And it really related back to the Boardman Coal Plant, and the idea of Risk sharing in terms of operating performance for a plant where there were a lot of operating aspects to it. Today, where our thermal deployment is fixed and actually more variable, when the wind is not blowing, the sun is not shining.

Speaker 2

The mechanism no longer really applies when it's largely a renewable based system based on wind, solar and other natural resources, as well as the import and export throughout the entire Western interconnect to Renewable resources across the market footprint of the entire West. And when you also look at The reliability concerns that we as well as every aspect of the country have for resource adequacy and the advances that the Western Power Pool has made getting their FERC approval last quarter and moving forward towards the Western Resource Adequacy Program, it's really time to take a wholesale relook at the It's not common across the industry. In fact, we're a far outlier and we look forward to working with parties to figure out a mechanism that will work better going forward in this new environment, Or I should say this continually evolving environment. Right.

Speaker 8

All right. Thank you. That's a very helpful color. And then just a High level question about the service territory. I'm wondering if you see any shift in the kind of demographic trends In your territory where historically you relied on the population inflow, right?

Speaker 8

And is that still the case? Is that maybe Changing where industrial commercial load will be the main driver for you going forward? Just kind of curious if there's any change there.

Speaker 2

It's also a good question. There are several different reports that have different data with regards to in migration. What we continue to see is in migration that is at or a little bit higher than the immigration that we've seen over the last Decade. So north of 1% in migration. What we also were seeing is continual advances in renewables that is attributed and that's actually part of our strategy.

Speaker 2

And as you may know, this area has long had a history of Energy Conservation, and we're one of the leaders, in terms of that area, not only as a utility, but as an entire state. So I think you'll we will not see as much load growth from residential or commercial. And so most of the load growth will come from industrial, but we'll continue to see customer growth. The one area that I it's not included in that, is electric vehicles. We're the 4th largest market for electric vehicles and have the 2nd highest penetration in the country.

Speaker 2

And we have a number of, I I think tremendous opportunities with some of the IRA dollars going to our customers who are already looking to expand their use of electric vehicles. And in particular, we have a number of fleets who are looking at last mile delivery And Daimler has their electric truck manufacturing actually located in our service territory as well. So there's a lot of moving pieces in terms of the load side, but most of that Continues to be fairly robust. We believe in our 2.5% to 3% low growth for this year in our long term forecast.

Speaker 8

Made in, thank you for the comments. Appreciate it. This is all for me.

Speaker 2

Thank you.

Operator

Thank you. One moment please. Our next question comes from the line of Anthony Crodwell of Mizuho Group. Your line is open.

Speaker 5

Hey, good morning. Thanks so much for the time and Jim congratulations. Tom Brady also retired too, I guess.

Speaker 4

Okay. Thank you for that.

Speaker 5

If I could Follow-up to Julian's question, but maybe flip the question around, and this is related to the success the company's had in winning the RFPs. The 39% that maybe the company did not win, could you talk about was it strictly on price that the company didn't win or are there other Factors to how the company was not successful in that 39% of the bidding?

Speaker 2

There's a lot of factors come in. We do we take a broad look and work with an independent evaluator. And so it's lease risk, lease price, and all these factors come into play and it's a fairly Parent process with independent evaluator and the commission. So I do think that the competitive nature really helps deliver The best projects for the best value for customers over the long term.

Speaker 5

Great. And then if I could just pivot, I think a trial began earlier this week related to some wildfire damage associated with another utility in the state. I think it

Speaker 7

was Pacific Corp.

Speaker 5

Just curious, if that creates more scrutiny on Portland or does that provide an

Speaker 2

We can't comment on anything that's Going on in terms of litigation, whether it pertains to ourselves or any other utility. And I think as we look at wildfire, We're really focused on doing the right thing, making sure that we're protecting our customers, investing in our grid, and we have a good solid program that we've developed over a number of years.

Speaker 5

Bless you. I think you're Sneed, sorry.

Speaker 2

I did. Thank you.

Speaker 3

You're welcome.

Speaker 5

Great. I'll leave it there. Thank you.

Speaker 2

Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Travis Miller of Morningstar. Your line is open.

Speaker 3

Good morning. Hey, Gerard. Congratulations, John. Job well done, Jim. Thank you.

Speaker 3

Question on the C side, what's the rate timing in terms of recovering that investment that you're thinking about? Would it be a Lump sum in a rate case in 2025, 2026 or is there a chance to get payments along the way?

Speaker 4

All of these projects, Travis, are eligible for AFUDC, so that's a starter. Secondly, it is our belief that projects such as this are eligible to be treated under our renewable adjustment clause. Now that clause was implemented probably 15 or more years ago, but projects like this were not really Contemplated at this kind of scale or even this type and we certainly didn't have a grid like we have today. So we have sought clarification in the recently filed rate case that the RAC or the Renewable Adjustment Clause Applies to the recovery of these investments because they are associated With the build out of renewals, that's a key word, a key phrase, a key concept in terms of deploying the rack. If for some reason, which we don't think is appropriate, but if for some reason it's judged not to have the RAC apply, We will have to seek ordinary rate case treatment to get those assets into rate case.

Speaker 2

I would also add is from an operator's perspective, these will be really important investments that will help us balance the grid, Improved stability. The volatility from wind and solar is hard and these Assets couldn't come on any sooner and we really look forward to them enhancing our increasing renewable portfolio. It will be very important As we move forward for the stability and reliability of our system.

Speaker 3

Just to put a

Speaker 4

cap on that, Travis, the decarbonization plans that we have are so significant that I don't think we can do it without these kinds of battery resources. So they are a linchpin, I believe, in the build out of renewables and achieving the decar plan that we have.

Speaker 3

Okay. That's helpful. In that rack, just as a quick follow on, would Clearwater also qualify or would it be Just essentially seaside and future projects.

Speaker 4

The Clearwater project clearly Qualifies for the RAC treatment.

Speaker 3

Okay, very good. And then, eye level question, Hydro impact, do you expect anything material this year just based on the snowpack levels?

Speaker 2

So as you probably have seen in our 10 Q disclosures, we continue to have low hydro in the Columbia River and basin at 85%, 86%. That is A big deal. Well, the Arclakimas projects are running at 104, the DSUES is at 93, Pricing and availability across the entire region is based on the Colombia. So we've seen a downward if you look at the numbers, you can see an increase in thermal use in the Q1, and you A decrease in our ability to purchase hydro. One of the things that also took place is really cold in February March.

Speaker 2

And so all of that snowpack stayed in the mountains. So I think you'll see dramatically improvement in the second quarter and we hope to have some of that around for the Q3, but that's really where we'll see the impact of the lower amounts versus last year. And last year, I remember, was quite significantly above normal. In addition, we have an extraordinary situation of California having almost 200% hydro conditions as they deal with a lot of water. So All of us in the West are beneficiaries of that, in particular, obviously, California.

Speaker 2

But they haven't had these kind of conditions in 40 or 50 years.

Speaker 3

Yes. Okay, great. Thanks so much. Appreciate it.

Operator

Thank you. One moment please. Our next question comes from the line of Andrew Stewart Levi of Hite Head. Your line is open.

Speaker 6

Hey guys, can you hear me well?

Speaker 7

Yes, Andy.

Speaker 6

Good. Okay. You're retiring, Jim.

Speaker 3

You don't retire. You've

Speaker 6

done a really amazing job. Thank you for that and thank Maria for hiring you and guys we're actually really nice happy team together.

Speaker 3

Thank you, Andy.

Speaker 6

Yes, I'm sure they're as sad to see you go as I am. Okay. So questions. I have a couple of questions. So just bear with me here.

Speaker 6

I guess first just on the ATM, I guess it just sounds like The $500,000,000 of the forward that kind of gets you through Clearwater. And then the incremental Equity is for your current cap the batteries and as you said, the $800,000,000 base plan. Is that kind of the way to think about it?

Speaker 4

Generally fair to say, I think the $500,000,000 will take us a little further than that. And then the ATM will bring us into that next phase of capital, The battery project or hopefully projects. Right,

Speaker 6

right. Yes, probably 500,000,000 tons or something, if you add The last 75 megawatts.

Speaker 3

If you add

Speaker 4

the last one, we should cross over $500,000,000 for those battery projects, if we're able to close the last one.

Speaker 6

Right, exactly. So just as far as the timing of the ATM, like when it may begin, I guess it's more of If you kind of look when you need the money, it's like $70,000,000 $130,000 $160,000 So is the ATM more of a $24,000,000 exercise?

Speaker 4

It might be. We'll want to be opportunistic. The share price has increased Since the block transaction of last year. And there's opportunism plus There is risk management, right? We have known significant capital expenditures.

Speaker 4

So we want to make sure that we manage those coming expenditures wisely in as antidilutive a way as possible. So that's the balancing act here and we'll be able to use some debt to, If you will bridge some of those payments and we'll be able to dollar cost average as you would imagine The use of that money. So it's a great tool for us, considering the large $4,000,000,000 of capital over the next 5 years that we really have. So we talk a lot about incremental capital, But base capital over 5 years is $3,000,000,000 right? So we are in a Heavy growth phase as we look forward here.

Speaker 6

Well, that actually leads to my next question. And So you have this 5% to 30% growth rate out there. Obviously, you have a tremendous amount of CapExrate based growth. There's obviously some equity that's going to be issued that's going to lower the EPS growth a little bit. This latest CapEx updates to get you firmly, I guess, within the midpoint of your 5% to 7 Growth rate, if not higher, is that kind of the way to think about it?

Speaker 6

And that's EPS growth that we're talking about.

Speaker 4

That's right. I mean, I think, we had a lot of confidence in this plan. A year ago or thereabouts when we Increase the growth rate. We were questioned a great deal about can you get there. And now the questions are coming, how much higher can you And I want to point out one thing here, which is that we need to be very careful as we prosecute this growth plan Regarding customer bills, we have to be very deliberate as we execute, So that we respect the customer value proposition.

Speaker 4

The rate base growth here, you might have seen in the Larger investor presentation was increased slightly. It's got a CAGR of about 8.6%. And I think we illustrated In the other slides that the procurement phases that we're in only require About a 25% win rate of these RFPs to get us squarely in the range of the 5% to 7%. So I think we're bearing out, proving out that we can get there and we're going to pause On that growth rate guidance and execute. If we execute well, we'll reevaluate that.

Speaker 6

Okay. But I guess the answer to my question was yes, right?

Speaker 4

Essentially, yes.

Speaker 6

Yes. Okay. Thank you. And then the last question I have, Just as you go to your walk for the Q1, and then you see like a combo of $0.26 of Kind of higher power prices for no better way to put it, whether it's $0.08 of higher load or the impact of higher prices. How does that kind of incorporate into the PKAN?

Speaker 6

Is that all like a because you have $0.22 of upside from sales. Is that $0.26 Kind of apples to apples when it comes to recovery or the PKAN. And then my additional question to that is, as you get whether it's the battery storage Or other renewables coming online, whether it's contracted or whether you own it. Should that take away some of the volatility? And I understand you're trying to get the TCAM changed, I get that.

Speaker 6

And as far as the volatility and being so dependent on the spot market or this forward market, Well, that kind of you look at this $0.26 if you kind of have these assets operating today, would those numbers have been lower?

Speaker 2

So it's a great question, Andy, and you're getting at actually some of the implications of a Energy system that is largely based on renewables. And so when you're in sort of tail conditions, prices spike, People are using more electricity than a forecast or is in our annual update tariff. And you can see that overall in the Q1, Energy cost us $13,000,000 more than we expected. That's one of the reasons we Forward to the batteries, whether they be owned or contracted, to be able to smooth out some of these The volatility, the projects themselves are 4 hours in duration. And so they really will be able to keep us through The changes between different times of day and different market conditions, not necessarily adding long term capacity that would add to, let's say, a drought year or a far possible year, but they absolutely will have an impact and there's no differentiation between whether we own them or not.

Speaker 2

But we again, we look forward to them coming online. They'll have a good impact as we move forward.

Speaker 4

And I expect that we're below the dead band. I don't think there'll be any refunds this year. So just in terms of the operability of the PKAM, That's my outlook right now.

Speaker 2

Yes.

Speaker 6

Well, I guess, just real quick, just what I'm a little confused about, I guess, is because Your total PKAN hit is not even if you're completely below that dead band on the bottom, it's not like $0.18 or $0.26 I guess I understand there's a formula on that, but some of that $0.26 is not all kind of TCAM lost earnings For the company, right?

Speaker 2

So overall in the Q1, margin was largely flat. So what we picked up an additional load and mix, we lost in serving that load and mix with higher energy prices. I think given the volatility, we've done a lot of things to improve our management through these extraordinary times.

Speaker 8

But as

Speaker 2

you saw at the end of December and as well as some of the Q1, we saw gas prices none of us ever thought we would see. So it's too early to call it For the full year. But there's no question that these additional resources will make a difference. And with every quarter, we hope to do better.

Speaker 6

Okay. And what was the PKAN negative hit in the Q1? Can you guys quantify that? $13,000,000 $13,000,000 of pretax.

Speaker 5

Okay, got it.

Speaker 6

Thank you very much. Thank you, guys.

Speaker 8

Thanks, Ann.

Speaker 6

Good morning, Steve. All right.

Speaker 2

Talk to you soon. Thank you.

Operator

Thank you. I'm showing no further questions at this time. I'll turn the call back over to Maria Pope for any closing remarks.

Speaker 2

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

Speaker 2

Bye bye.

Operator

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.

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Earnings Conference Call
Distribution Solutions Group Q1 2023
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