Portland General Electric Co (POR) 2006 Q3 法說會逐字稿

Good day, everyone, and welcome to Portland General Electric Company's third quarter 2006 earnings results conference call. Today is Monday, October 30, 2006, and this call is being recorded. (OPERATOR INSTRUCTIONS). For opening remarks, I would like to turn the conference call over to Portland General Electric's Director of Investor Relations, Mr. Bill Valach. Please go ahead, sir.

Thank you, Ian, and good afternoon, everyone. I'm Bill Valach, Director of Investor Relations at Portland General Electric, and we're pleased that you're able to participate with us today.

Before we begin our discussion this afternoon, I would like to make our customary statement regarding Portland General Electric's written and oral disclosures and commentary. There will be statements in this call that are not based on historical fact and as such constitute forward-looking statements under current law. These statements are subject to factors that may cause actual results to differ materially from the forward-looking statements made today. For a description of some of the factors that may occur that could cause such differences, the Company requests that you read our most recent Form 10-K and Form 10-Qs. Form 10-Q for the third quarter ending September 30, 2006 will be available at PortlandGeneral.com by the end of the week. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. This Safe Harbor statement should be incorporated as part of any transcript of this call.

Portland General Electric's third quarter 2006 earnings were released before the market opened today, and the release is available on our Website, at PortlandGeneral.com.

With me today from Portland General Electric are Peggy Fowler, CEO and President, and Jim Piro, Executive Vice President of Finance, CFO, and Treasurer. Peggy will begin this call with an overview; Jim will then discuss in more detail our third-quarter and year-to-date financial results; then we will open the call up to questions. To open our discussion this afternoon, I am pleased to introduce Peggy.

Thank you, Bill. Good afternoon, everyone, and thank you for joining us. We welcome all of you to Portland General Electric's third-quarter earnings teleconference and Webcast. Whether you joined our call last quarter, or if you are attending for the first time, we appreciate your ongoing interest in Portland General Electric.

PGE has a long history as a Pacific Northwest generation, transmission and distribution company. These core areas have been the primary focus of the Company, and our intention is to continue to maintain and build on these long-standing strengths.

During today's teleconference I will discuss third-quarter earning results, the latest on Senate Bill 408, earnings guidance, an update on our current regulatory proceedings, updates on capital projects, and a dividend announcement.

Earlier this morning we announced net income of 10 million, or $0.16 per diluted share, for the third quarter ending September 30, 2006. This compares to net income of 19 million, or $0.30 per diluted share, for the third quarter of 2005.

Results for this past quarter were influenced by a number of factors, including a reserve taken for Senate Bill 408 and continued growth in our service territory.

Our total customer base has reached another high this quarter, 793,000 customers. This level compares to 779,000 in the third quarter of 2005. Jim will provide more detail on third-quarter results.

Now I would like to provide an update on Senate Bill 408 because of its unique nature and significant impact on Oregon utilities. PGE has taken an additional 22 million pre-tax reserve for the third quarter of 2006 based on the Oregon Public Utility Commission's final order. The intent of Senate Bill 408 is to ensure that the amount collected from customers for income taxes matches the amount paid to governmental entities by investor-owned utilities or their consolidated group. On September 14, 2006, the OPUC issued a final order on Senate Bill 408. This order adopts the use of fixed reference points from the most recent ratemaking proceedings to determine the amount of taxes collected from customers for income taxes. In addition, the OPUC determined that interest should accrue beginning January 1, 2006 for any deferrals under Senate Bill 408.

Based on our assessment of the final rules, we have revised the original 2006 estimate at 18 million pre-tax and potential refunds to customers to 42 million pre-tax. Based on this estimate we recorded a 31 million pre-tax reserve for the first nine months of 2006, including 22 million during the third quarter. PGE will continue to evaluate the legislation and the rule. We will look at options for changing or modifying the legislation rules and challenging any adjustments that follow for the 2006 tax year.

Moving on to our updated earnings guidance. PGE is revising its full-year 2006 earnings guidance, from $0.95 to $1.05 per diluted share to $0.90 to $1 per diluted share. The revised guidance is based on the Company's assessment of the OPUC's final rules on Senate Bill 408, which was offset in part by improvements in operations. The guidance does not include any regulatory recovery on the Boardman deferral request of 46 million for the incremental replacement power cost.

The Company reaffirms its full-year 2007 earnings guidance range of $1.70 to $1.80 per diluted share. Annual earnings growth over the long-term is expected to be in the 4 to 5% range. This guidance continues to exclude any adjustments for Senate Bill 408.

Now I would like to provide updates on our key regulatory filings currently before the OPUC.

First, on Boardman. On October 3, 2006, oral arguments were heard by the OPUC on PGE's application for deferral of power costs related to the Boardman outage. A decision is expected in the fourth quarter of 2006 or early 2007.

Regarding Trojan investment recovery, on August 31, 2006, the Oregon Supreme Court concluded that the OPUC has primary jurisdiction to determine what, if any, remedy it can offer to PGE customers for any amount of return on the Trojan investment that PGE collected in rates from April 1995 through October 2000. The Supreme Court further stated that if the OPUC determines that it can provide a remedy to PGE's customers, then the class-action proceedings may become moot in whole or in part. However, if the OPUC determines that it cannot provide a remedy and the decision becomes final, the court system may have a role to play. Once the OPUC has made its ruling and plaintiffs have exhausted legal challenges, the plaintiffs will retain the right to return to the Circuit Court for disposition of whatever issues remain unresolved. Based on the Supreme Court decision, we are requesting a prehearing conference with the Administrative Law Judge to discuss how best to move the current Trojan [reman] case before the OPUC to a final decision.

Now for a brief update on the rate case. We are actively engaged in the general rate case filed with the OPUC in March 2006. Based on a 2007 test year, our general rate case proposed a retail rate increase of 143 million across all customer classes. This included a return on equity of 10.75% and an equity structure of 56% to become effective in early 2007. The OPUC staff, the Company, and key intervenors have signed stipulation agreements which settle multiple revenue requirement items. Key issues of cost of capital and power costs remain outstanding.

On October 25, 2006, PGE filed rate case testimony updating its cost of capital which included a reduction in our equity capital structure from 56 to 53%. This was the result of an additional debt issuance associated with capital expenditures expected for our Biglow Canyon wind project. We also requested that advanced metering infrastructure be reviewed in a separate proceeding. The OPUC is expected to issue its final order in mid-January 2007, following public hearings, briefs and oral arguments.

Now I'd like to mention two significant capital projects we are continuing to develop this year to further enhance our generation portfolio.

A critical part of PGE's infrastructure investment plan includes completing the 400 MW natural gas-fired Port Westward generation plant. We're pleased to report that this project is on schedule and on budget. The Port Westward site is located adjacent to the Columbia River in Columbia County, Oregon. When this plant comes online in the first quarter of 2007, its generating capacity will power around 300,000 homes annually. Port Westward will be the most efficient power plant of its type in the Pacific Northwest and will help meet the growing energy needs of our customers.

Now on to our wind project. We believe that renewable energy is an important part of an alternative resource, so we're diversifying our generation portfolio with the proposed addition of the Biglow Canyon Wind Farm in Eastern Oregon. This project would allow us to develop up to 450 MW of energy capacity in three phases over a five-year timeframe. Plans for Phase I of the project call for 126 MW of capacity, with capital expenditures of approximately 247 million. The OPUC recently granted approvals related to the Biglow Canyon Wind Farm, and PGE is currently negotiating contracts with the intention of a 2007 completion of Phase I.

We are pleased to announce that PGE's Board of Directors has authorized the payment of a quarterly dividend in the amount of 22.5 cents per share, payable on January 15, 2007, to shareholders of record as of December 26, 2006. Our goal is to pay a competitive dividend while investing to meet the needs of our growing business. We continue to anticipate earnings growth of 4 to 5% over the medium to long term, and are targeting a long-term dividend payout ratio of approximately 60%.

With that, I'd like to turn the call over to our Chief Financial Officer, Jim Piro, to discuss the quarter's results in more detail.

Thank you, Peggy, and good afternoon, everyone. As Peggy stated earlier in the call, PGE's net income for the third quarter ending September 30, 2006 was $10 million, or $0.16 per diluted share. This compares to net income of $19 million, or $0.30 per diluted share for the third quarter of 2005. Operating revenues of $372 million for the third quarter of 2006 reflect a 4.8% increase compared to the prior year's third-quarter operating revenues of $355 million.

In addition to the customer growth we're experiencing, there were several contributing factors to this increase -- first, loads were up with unusually warm weather in September; second, a January 1, 2006 price increase of approximately 3.7% related to higher power costs; and third, an increase in wholesale sales due to favorable hydro generation, availability of thermal generation, and excess wholesale power purchases. Partially offsetting these increases was the $22 million reserve taken related to Senate Bill 408.

Purchased power and fuel expense increased by $32 million, primarily due to increased retail load and wholesale sales. These increases were partially offset by favorable regional hydro generation. Production, distribution, administrative and other expenses increased by $2 million compared to last year's third quarter.

For the nine months ending September 30, 2006, net income was $31 million, or $0.50 per diluted share, compared to $73 million, or $1.17 per diluted share, for the same period in 2005. Total operating revenues increased by 4.2% to $1.1 billion in 2006 from $1.06 billion in 2005. Factors increasing operating revenues were similar to what I described for the third quarter, including customer growth, the 3.7% price increase related to power costs, increased wholesale sales, and colder weather earlier in the year, with warmer weather in September and June. Revenues were partially offset by the $31 million reserve taken for Senate Bill 408.

Purchased power and fuel expense increased by $134 million. This was primarily due to increased loads, unrealized mark-to-market losses of $13 million in 2006 compared to unrealized mark-to-market gains of $19 million for the same period in 2005, and approximately 52 million of incremental power costs incurred during 2006 to replace the output of the Boardman power plant. Again, these increases were partially offset by favorable regional hydro generation. Production, distribution, administrative and other expenses increased by $3 million compared to last year's first nine months.

Let me provide you some additional detail on Senate Bill 408 and explain why PGE has taken an additional reserve. The adoption by the OPUC of the fixed reference point for determining the amount of taxes collected in rates can produce unusual outcomes and result in a so-called double-whammy effect.

For example, if a utility incurs higher expenses or receives lower revenues, resulting in lower taxes paid than the OPUC had assumed it would incur in its last general rate case, then the automatic adjustment clause under Senate Bill 408 will require the utility to make a refund to customers and decrease the utility's earnings further. This is exactly the situation we are in this year, caused by the Boardman extended outage.

Conversely, if a utility incurs lower expenses or receives higher revenues, then the automatic adjustment clause under Senate Bill 408 will surcharge customers and increase the utility's earnings.

The OPUC recognizes the potential impacts of the double whammy, and has stated that it will be responsive to concerns related to the consequences of the double-whammy problem, and may address them in future rate proceedings.

So, based on our assessment of the rules, and specifically the fixed reference point methodology, and assuming the current legislation is not modified or changed, we have increased our full-year reserve estimate for the impact of Senate Bill 408 from $18 million to $42 million pre-tax. PGE will file a report with the OPUC by October 15, 2007 for the 2006 tax year regarding the amount of taxes paid, as well as the amount of taxes authorized to be collected in rates.

Now I would like to provide you with an update on PGE's capital expenditures for 2006. We estimate capital expenditures for 2006 to be $374 million, an increase of $16 million from the $358 million estimate we provided on last quarter's call. The breakdown is as follows.

$159 million for the Port Westward facility; by year end we will spend $246 million out of the project total cost of $258 million, excluding AFDC.

$193 million for ongoing production, including 28 million for hydro relicensing, transmission and distribution facilities, up from $170 million last year, and up $4 million from last quarter's estimate.

And approximately 21.5 million for the Biglow Canyon wind project, which is up $12 million from last quarter's estimate, and $0.7 million for the advanced metering infrastructure initiative. To date we have spent $8 million on the Biglow Canyon wind project Phase I, with the remaining capital expenditures contingent upon the signing of contracts.

We continue to maintain stable operating cash flows and adequate liquidity through both our $400 million five-year revolver and access to the commercial paper market. At the end of the third quarter, PGE had approximately 395 million of available liquidity under the revolver. Earlier this year, we executed a one-year extension on the credit facility, extending the maturity from July 2010 to July 2011.

Cash provided by operating activities totaled $108 million for the nine months ending September 30, 2006, compared to 402 million for the same period last year. The decrease was due primarily to a $203 million decrease in cash collateral deposits received from certain wholesale customers.

We continue to maintain the Company's investment-grade rating. Our senior secured ratings are Baa1 at Moody's, BBB+ at Standard & Poor's, and A- at Fitch.

PGE's financial objectives are focused on our core utility business. These objectives include -- providing capital to invest in assets to continue to achieve our service and reliability objectives, connect new customers, and add new generation; also, to maintain investment-grade ratings and earn a fair return on invested capital.

Over the long term, PGE targets a capital structure of approximately 50% debt and 50% equity, while maintaining a solid investment-grade bond rating. At the end of the third quarter our equity as a percent of total capital was 54.4%.

Now I will provide you a brief update on stock distribution. On October 3, 2006, approximately 1,640,000 additional shares of PGE common stock were released from the Disputed Claims Reserve, leaving the DCR holdings at approximately 53% of total shares outstanding. Interim distributions are expected to continue to occur every two months, with the next major distribution occurring in April of 2007.

Now I would like to turn it back over to Peggy.

Thanks, Jim. As PGE's service territory continues to grow, so do our opportunities to enhance service to our customers and provide the potential for earnings and dividend growth for our shareholders.

During the summer's heat wave and record-breaking peak loads, our dedicated work force excelled at providing safe, reliable power to our customers. As a well-capitalized company, we have opportunities to grow our regulated business through rate-based investments such as Port Westward, the Biglow Canyon Wind Farm project, and advanced metering infrastructure.

PGE continues to work closely with the OPUC, the Federal Energy Regulatory Commission, and customer groups to achieve fair regulatory outcome.

And we continue to build a strong board of directors that will help execute our strategy. This past Friday we announced the addition of Neil Nelson, President and CEO of Siltronic Corp, headquartered here in Oregon. Siltronic is a manufacturer of silicon wafers used in semiconductors. Neil is coming from an industry where power quality, reliability and costs are absolutely critical to manufacturing operations and profitability. His strategic vision will be important in helping PGE chart a course for Oregon's energy future.

I also want to invite you all to visit with us at the EEI conference in Las Vegas in early November. I will be there with Jim Piro and Bill Valach. We're pleased to present our company's story, both in person and by Webcast, on Tuesday, November 7 at 7:30 AM. We look forward to seeing you there.

Thank you for your time and interest in PGE. Operator, now we would like to open up the call for questions.

(OPERATOR INSTRUCTIONS). Paul Patterson, Glenrock Associates.

On SB 408, just so I can clarify this, you guys are filing in 2007 for the effects of 2006. And I guess, assuming that the Commission can act in a timely manner, I guess you guys would then -- let's say there was a surcharge or something of the sort. Would that surcharge -- would you restate 2006 or would that effect 2007's fiscal year, if you follow me?

Thanks for your question. I'm going to let Jim speak to this as he has the tax department.

We've recorded the reserves this year, so it's gone through our income statement. We'll file the tax report on October 15, 2007 for the 2006 test year. We'll then go through a process through the regulators, which is as yet undefined. If the regulators determine that we have overcollected for taxes, then we would refund those dollars to customers, probably starting sometime in 2008 once the process completes. It's not clear how long it's going to take them to get through the process. So, we've seen the income statement and balance sheet effect, but we have not yet seen the cash flow effect of that refund. And as Peggy mentioned, we hope to go back to the Legislature during 2006 -- 2007, and hopefully get the rules changed around this issue of the double whammy.

I guess what I'm wondering is -- is there a possibility, let's say, that there is a change? The way it looks is that, let's say in 2006 for some reason the quarter does a lot better than what you're actually reflecting in the income statement right now, and therefore, in October you would file something, but it wouldn't necessarily reflect what you guys -- (indiscernible) your reserve wasn't exactly perfect. I don't know; maybe that isn't likely. I don't know. But it would seem that might be a possibility. If I'm wrong, let me know.

We'll make another estimate at the end of the fourth quarter based on the year. We will then ultimately prepare our tax return during 2007. And so there could be some true-ups when we do the return to accrual, which we would at that time also adjust our reserve for that issue. So, depending on how the final year ends, we do all the final tax true-ups, there might be an adjustment. That would probably -- if it's small and not material, we would probably do it in 2007.

If the rules were to be changed on the double whammy, we probably -- once those rules got approved or the legislation got changed, we would again reverse the reserve to put it in the appropriate place.

Not to get too much into this, but what kind of -- how would you change the double -- what are you thinking of as the potential remedy to sort of change this, and how would it work -- I don't know if the word is ideal -- but in a more normal fashion, how do you think this might work if you were to get it changed? How would you prefer to see it, other than have it completely repealed? Is that a possibility?

I don't think that will happen. The specific language is what are the taxes collected in rates? Right now it's based on this fixed point methodology, which takes a percentage of revenue to calculate income taxes. We would rather use what we called in the discussions the floating rate, which is your actual taxes booked on the income statement for the utility.

The purpose of Senate Bill 408 was really to focus at the holding company issues, not at the operating company. So, we strongly believe that the taxes we book on our income statement ought to be the taxes collected in rates. So, moving forward, for PGE not being part of a holding company, this would not be an ongoing issue. So, that's the language we're trying to get cleared up.

Neil Kalton, A.G. Edwards.

A quick question on AMI. Just wondering if you could provide some additional details as to why that was sort of pulled from the current rate proceedings, and also when might you expect to refile that.

Thanks for your question. We did -- in our original in October of 2006, we filed testimony that really requested AMI be withdrawn and put on a separate track. In discussion with the Citizen Utility Board and some of those folks, they wanted a better understanding of what was involved. We're looking at about a capital expenditure of about 140 million. We think that it does show efficiency improvements, some good customer options, provide some long-term goals for demand-side management that would help us.

Our issue really is just the increases we have in the current rate case. We're better to deal with those right now, and then once we're through the rate case next spring, look at AMI again and get all the parties involved at the table and understand what the right timing is. I think it's a matter of when as much as if it will actually occur. It's really the timing on it.

Michael Lapides, Goldman Sachs.

A quick question. Just thinking about your CapEx forecast for '07 and '08, noticed in your testimony that was filed last week that you've moved up a lot of the CapEx to 2007, and therefore, also mentioned that you were moving up the debt financing for -- into '07. Can you just give a little bit of guidance on kind of what the new CapEx forecast is for the next two years?

A brief comment on it. The main change is we've moved up the expenditure for the Biglow Canyon Wind Farm, and Jim can talk a little bit more about the projection on capital.

With Biglow Canyon moving forward, we still haven't signed final contract, but we wanted to give the PUC an indication that we would likely be issuing an additional debt. We have filed an application to file additional debt for the financing of the Biglow Canyon project. So, when you put that debt into the capital structure, it brought down our equity percentage, which we thought was appropriate. The actual -- that financing is still expected. Until we get those contracts signed, we will not do that financing.

As it relates to other capital expenditures, we will have a nice table for you at EEI which will break down our capital by year, including hydro relicensing, the Biglow Canyon project, our current estimate of AMI, as well as just the ongoing capital. But the big thing was the insertion of the Biglow Canyon into our capital program, which was not included in the rate case before.

I just wanted to make sure. Because if I look at the presentation you guys did a few months ago, you had 2007 CapEx of around $470-ish million, and I don't know if you had disclosed a 2008 forecast; I'd have to go back and check in one of your SEC filings. So, can I assume that 473 had part of Biglow Canyon, but not all?

It had all of Biglow Canyon and the wind project included.

I thought Biglow Canyon was the wind project.

And AMI; excuse me.

So, we should take out AMI but front-end-load all of Biglow Canyon?

Biglow Canyon was in that 2007 number, and we included some expenditures for AMI. AMI may get delayed just based on the process we're going to go through. So that may push those capital expenditures out a bit. And like I said, at the EEI when we put our presentation together, we'll give you year-by-year capital expenditures probably through 2010.

[Leon Dubov], Zimmer Lucas Partners.

I just had a quick question about the mark-to-market gain that you guys booked. Can you kind of walk us through a little bit of where that comes from and how we may -- I guess, how we should be thinking of that and how we might be able to model that going forward?

Thanks, Leon. I'll let Jim talk about that subject

I think you saw in our quarter -- in our press release for the quarter we talked about that the quarter included -- year-to-date included a $13 million -- currently included a $13 million net loss on mark-to-market activity. Let me take a step back before I explain the numbers a little bit.

For 2006, we had in place a price increase that covered our power costs. Certain of our derivative instruments do not qualify as normal purchase or normal sale; therefore, they go through mark-to-market accounting. We have revenues to cover those contracts. But because we are required to do mark-to-market accounting there's a timing difference.

If you went back to the end of the second quarter we had disclosed a $25 million mark-to-market loss through the end of the second quarter, and we said that would reverse through the rest of the year as those contracts settled. So, if you look at the third quarter, we had a $12 million mark-to-market gain, which reduced that $25 million mark-to-market loss, which leaves us at the end of the third quarter with a $13 million mark-to-market loss, which should reverse by the end of the year. And that's all predicated on the fact that we had -- we set prices in 2005 for the 2006 test year for power costs. So, this is some timing issues that we will continue to kind of have to disclose and let you know how it fits in the year. But to think about those, most of those are just timing issues, and they will close out by the end of the year.

(OPERATOR INSTRUCTIONS). Steven Gambuzza, Longbow Capital.

I just wanted to clarify one more point regarding the CapEx plan. The $374 million that you've given guidance for for 2007, my understanding is that does not contemplate a completion of Biglow Canyon by the end of 2007. Is that correct?

It does -- it does contemplate completion of Biglow Canyon by the end of 2007.

So, all the incremental Biglow Canyon CapEx is included in that (multiple speakers)

For Phase I.

The number that I gave -- I said there is -- in 2006 there's about $21.5 million for the Biglow Canyon wind project; then the remaining amount of dollars would be spent in 2007 to get that project up and in service. And I think we said there's about $247 million of CapEx associated with the entire wind project, excluding [AFEC].

And that's all in that $374 million figure?

374 was just for 2006. That was our total capital expenditures for 2006.

I'm sorry for the confusion. Thank you.

There are no further questions at this time.

I guess we're ready to end the call. We appreciate your interest in Portland General Electric. We invite you to join us when we report on our fourth-quarter and full-year results. Again, I hope to see many of you at the EEI conference in Las Vegas in early November. If you have any additional questions, please contact Bill Valach, who will be available after this call. Again, thank you for participating.

That concludes today's conference call. You may now disconnect your line.