Portland General Electric Co (POR) 2008 Q1 法說會逐字稿

Good afternoon and welcome to the Portland General Electric Company's 2008 earnings results conference call. Today is Monday May 5, 2008 and this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer period. (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.

Thank you, Kristy, and good afternoon everyone. I'm Bill Valach, Director of Investor Relations at Portland General Electric and we are very pleased that you're able to participate with us today. Before we begin our discussion this afternoon, I would like to make a customer statements regarding Portland General Electric's written and oral disclosures and commentary.

There will be statements on 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-Q. The Form 10-Q for the first quarter ending March 31, 2008 will be available this Wednesday May7 at PortlandGeneral.com.

The Company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise and this Safe Harbor Statement should be incorporated as part of any transcript of this call. Portland General Electric's first quarter 2008 earnings were released before the market opened today and the release is available at PortlandGeneral.com.

With this release PGE announced earnings of $28 million or $0.44 per diluted share for the first quarter ending March 31, 2008 compared to $55 million or $0.88 per diluted share for the first quarter ending March 31, 2007. With me today 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 first quarter results and then we will open the call up for questions. Now it's my pleasure to turn the call over to Peggy.

Thank you Bill. Good afternoon everyone and thank you for joining us. We welcome you to Portland General Electric's 2008 first quarter earnings call. Since we became public two years ago, we have been strengthening our existing foundation with projects like Port Westford and the Biglow Canyon Phase I. Now as we look ahead five to ten years, we continue to see opportunities develop an even stronger company for our customers and shareholders. We're moving ahead with Biglow Canyon Phases II and II, we're making progress with our integrated research plan. We are focused on helping our customers succeed because with their success we can deliver value to shareholders.

Today I'm pleased to share the news of solid financial and strong operating results for the first quarter. I will also give a high-level economic outlook for Oregon and update you on a few significant projects. We'll begin with earnings guidance.

PGE is reaffirming its full year 2008 earnings guidance of $1.75 to $1.85 per diluted share. 2008 guidance assumes normal hydro and plant operations. Based on our current capital forecast, our long-term annual earnings growth expectation beginning in 2008 is 6 to 8% which will support continued growth in our dividend. We are pleased to service dates (inaudible) better than most regions given the current economic situation.

Although the state's economy has slowed somewhat from last year as a result of the housing market decline and the lumber and wood products sector slowdown, we remain optimistic. Oregon state unemployment rate is largely unchanged from the fourth quarter of 2007. Oregon continued to perform better than the rest of the nation.

While other regional employers cut jobs, Oregon posted close to 1% payroll growth in the first quarter of 2008. And we continue to project a 1.9% increase in weather adjusted retail loads for 2008 due to higher forecasted commercial and industrial demand. This growth is expected to compensate for the flat residential demand caused by the housing market decline as well as conservation in energy efficiency efforts.

Oregon's current economy is diverse and unlike most other states, manufacturing is prospering in Oregon and creating jobs. We're beginning to see solar manufacturing companies locate here, companies such as Solar World, Soleil (inaudible) and (inaudible). This developing solar cluster is taking advantage of the strong semiconductor base that is already here. And it reinforces Oregon's reputation as center for sustainability and clean technology.

PGE is actively working with our state and local economic development partners to encourage businesses including solar, wind, wave and other clean technologies to consider Oregon as an attractive location. All of these positive economic factors contribute to continued customer growth in our service territory.

In the first quarter we added approximately 4000 new customers bringing our total retail customers to over 808,000. And these customers remain interested in renewable power auctions. The National Renewable Energy Laboratory just released its annual rankings and for the third year in a row PGE sold more renewable power to residential customers than any other utility in the United States. Overall we ranked number two for total number of customer participants and total renewable kilowatt hours sold to residential and commercial customers combined.

Our commitment to renewable resources to meet the needs and values of our customers. Overall satisfaction remains in the top quartile for residential customers and in the top decile for small to medium-sized business customers.

Our generation plants continued to perform well to. Our Port Western plant is running well and continues to receive recognition for its engineering excellence. The plant received the Combined Cycle Journal's 2008 best practices award for its implementation of digital communications technology. The availability of our plants during the first quarter including both thermal and hydro was approximately 92% with thermal at 89% and PGE-owned hydro at 100%.

While the region has experienced a lot of snow this winter, we have seen a decrease in energy from hydro resources compared to the first quarter of 2007 due to colder than normal weather which has delayed the snow melt. Current forecasts continue to indicate near normal hydro conditions for 2008 including 99% (inaudible), 130% on the (inaudible) and 100% on the Columbia River at Grand Coolie.

Not only did our generating plants perform well in first quarter but results for power quality and reliability performance are on target with our 2008 goals. These performance metrics include customer outages, outage durations and momentary interruptions. Also on target is our progress with the Biglow Canyon Wind farm, a great sample of PGE's ability to meet expectations and move a project forward.

On April 3, we announced the agreement to buy 141 turbines from Siemens Power Generation to complete the construction of Biglow Canyon. These 2.3 MW turbines will have an installed capacity of 325 MW. We expect Phase II will have 65 turbines installed in 2009 and Phase III will have 76 turbines installed in 2010. We estimate that the cost of both phases to be between 740 and $780 million including AFDC. With the completion of Phases II and III, Biglow Canyon is expected to have a total capacity of nearly 450 MW making it one of the largest wind farms operating in the northwest.

The Biglow Canyon facility will help PGE satisfy Oregon's renewable energy standard which requires us to meet 15% of our loads with renewable resources by the year 2015 and 25% by 2025. The Oregon Public Utility Commission agrees that our need for additional renewable resources is reasonable so we issued a request for proposal on April 23 seeking up to an additional 218 average MW of renewable resources. This is an addition to Biglow Canyon Phases II and III. We're hoping to have a variety projects to evaluate such as wind, solar, geothermal and biomass. Fulfilling the additional 218 average MW will result in PGE meeting the 2015 target.

These renewable resources were part of our integrated -- our latest integrated research plan. The OPUC has requested that PGE resubmit our IRP within 12 to 18 months in order to prepare additional longer-term analysis to address resource decisions beyond 2012. This analysis will include future decisions on emissions controls at the (inaudible) plant and the potential effects of federal climate change policy. We're also making progress with Advanced Metering Infrastructure.

We're currently awaiting an order from the OPUC on AMI and expect a decision by the end of May. Once we complete acceptance testing by the end of 2008 we will begin to [put] the deployment process of installing over 800,000 meters. AMI will provide operational efficiencies and cost savings as well as improved services for our customers.

On the public policy front, I would like to acknowledge the partial restoration of benefits from the Bonneville Power Administration's residential exchange program. In March, PGE and BPA signed an interim relief agreement that partially restored the federal hydropower benefits to our residential and small farm customers. On April 15, PGE began passing on average price reduction of 6.3% to customers. We will continue to work hard on behalf of our customers to restore future benefits.

With that, I would like to turn the call over t our Chief Financial Officer, Jim Piro, to discuss our financial results in more detail.

Thank you, Peggy, and good afternoon everyone. PGE's net income for the first quarter 2008 was $28 million or $0.44 per diluted share compared to net income of $55 million or $0.88 per diluted share for the first quarter 2007.

2008 results reflected increase in retail energy deliveries due to both an increase in the number of customers served and cooler weather compared to the first quarter 2007. The addition of Port Westward and Biglow Canyon Phase I and continued strong thermal plant operations also contributed to positive results for the first quarter of 2008.

The primary offset to these positive results was reduced hydro generation due to colder than normal weather which has delayed the snow melt. The impact of reduced hydro generation was approximately $6 million after-tax or $0.10 per diluted share. We're forecasting that the reduced hydro generation will reverse by year-end with the expected delayed runoff. Also offsetting these positive results was a reduction in income from nonqualified benefit plan assets of $5 million after-tax or $0.05 per diluted share.

As reminder, first quarter 2007 results included two onetime items, a positive $14 million or $0.22 per diluted share for the deferral of a portion of (inaudible) replacement power cost and a positive $4 million or $0.06 per diluted share related to settlements between PGE and certain California parties. We continue to work with our regulators to customer groups on a number of regulatory matters in order to achieve positive results. First our 2009 general rate case.

First our 2009 general rate case. In February, we filed our general rate case based on a 2009 forward test year.The filing proposed an 8.9% average increase with new prices expected to go into effect in January 2009. The increase is driven by three key factors -- first higher purchase power and fuel costs; second increased property expenses including the increased cost of materials, labor and health-care and compliance with government regulations; and third, higher capital cost including the return on equity and the cost of ongoing system improvement in our hydro licensing project.

The revenue requirements include a return on common equity of 10.75% based on an expected capital structure of 50% equity and 50% debt and an overall weighted average cost of capital of 8.66%. A procedural schedule has been established for the general rate case. The next step is settlement conferences on June 5 and 6 followed by testimony and concluding with an order from the OPUC by December 29. The 2009 general rate case filing does not include AMI or Phase II and III three of Biglow Canyon. These projects are being covered in separate regulatory proceedings.

Now an update on Trojan. We're pleased that we now have a procedural schedule and the OPUC has indicated that their final order currently scheduled for September 12, 2008 will be comprehensive and will address all Trojan related issues before them. Now, I'll provide you an update on PGE's capital expenditure program.

For 2008, capital expenditures are expected to be approximately $394 million including $223 million for ongoing production, transmission and distribution; $90 million for Biglow Canyon Phases II and III; $56 million for ongoing hydro licensing projects; $23 million for Advanced Metering Infrastructure; and $2 million for Boardman [emission] controls. Capital expenditures are $34 million lower than our prior forecast for 2008 primarily due to a change in timing of payments for turbines for Phases II and III of Biglow Canyon wind farm.

To finance PGE's capital expenditures and maintain our 50-50 capital structure we planned to issue a total of approximately $250 million of debt and $200 million of equity in late 2008 or 2009. We continue to maintain stable operating cash flow and adequate liquidity to fund ongoing operations through both our $400 million multiyear revolver and access to the commercial paper market. At the end of the first quarter, PGE had approximately $386 million of available liquidity under the revolver.

We continue to maintain investment-grade bond ratings. Our senior secured ratings are the [B AA 1] at Moody's and A at Standard & Poor's. The focus of our financial objective continues to be our core utility business. This includes efficiently accessing the capital markets to support investment in new and existing assets, achieve fair and reasonable regulatory outcomes, maintain investment-grade credit ratings and earn a fair return on our invested capital. Now I would like to turn it back over to Peggy.

Thanks Jim. Our first quarter results show we are executing our strategy and making significant strides towards meeting the growing energy needs of our customers. Biglow Canyon Phases II and III are moving head. We have issued the RFP for additional renewable resources. We're working closely with regulators and customer groups on our 2009 general rate case.

And we will continue to take advantage of the growth opportunities in our service territory through excellence in operations and rate based investments that deliver value to our customers and shareholders. We're also looking forward to our second annual shareholder meeting on May 7 which takes place here in Portland. Kristy, we would now like to open up the call for questions.

(OPERATOR INSTRUCTIONS) Brian Russo.

Could you maybe talk a little bit more about how many megawatt hours would you expect to generate from hydro facilities in a normalized first quarter?

Sure, (inaudible) to the hydro. We have the numbers on that because we figured that would be a question.

Yes, with both of our contracts on the (inaudible) Columbia and our own hydro generation we typically expect about 566 average megawatts of generation. And you can convert that to megawatt hours. It's about on a megawatt hour base it's 4,959,765 megawatt hours.

In the first quarter?

No that's for the full year.

Okay, for the full year.

That's an average for the full year. The first quarter is a little bit higher. I can calculate that while we're talking and let you know what we expected in the first quarter on an average. It was down about 71 average megawatts for the first quarter. So that's ow much we were down in terms of average megawatts during the first quarter.

That's very helpful. Can you remind us of what the ratebase is in Oregon in the pending rate case?

In the 2009 general rate case, it is 2.23 -- $2.366 billion.

And for 2008 it is 2.237 right now.

And that does not include -- I believe it does not include AMI or Biglow Canyon Phases II or III which -- Phase II wouldn't be completed until the end of '09. AMI will come in during the year. Advanced Metering Infrastructure project will come in during the year but it has its own separate tariff.

And then whether were there any Boardman cost deferrals in the second, third or fourth quarter of '07?

No.

It was all in the first quarter?

Yes, that's correct.

Other than interest charges on the deferral.

Right. Then just lastly what embedded natural gas fuel cost is in the Oregon GRC filing?

(multiple speakers)

Just a second, let me look it up. I have it here I just need to look it up for a second.

I would imagine there's some sort of true-up as the case gets closer to reflect the higher gas prices. I am just wondering what is kind of embedded in the 8% plus you outlined earlier.

I don't have those numbers in front of me. We do have the filing online that we could point you to (multiple speakers) don't have those numbers in front of me. For 2008, our gas prices were averaging around at our plants -- was averaging around $66 a megawatt hour. The actual price I don't know exactly the price that translates into.

Thanks a lot.

We'll get back to you on that. And we do have an annual true-up to that -- if you -- cost of gas and cost of coal going forward and that's part of the rate case going forward too. It's just we file it altogether in the case.

Okay, thank you.

Michael Lapides, Goldman Sachs.

I look forward to seeing you all next week here in New York. A couple of questions for you. One, on the Biglow Canyon II and III, what is the first year you expect you will get a full year benefit of both units [and rates]?

2011 would be the first full year of both units in because 2002 will be completed in 2009 so its first full year would be 2010 and then III would be completed in 2010 so its first full year would be 2011; so both units 2011.

Got it. So I want to make sure I've got there right. Biglow Canyon II impacts your 2010 rates and III -- both II and III impact 2010 and 2011?

Correct and then there is AFDC that goes along the way.

Understood; the all-in cost. And that's actually my follow-on question. What is your all-in AFUDC rate? I thought it was published in the Q or the K as something close to 9% but just wanted to doublecheck.

It tracks our weighted average cost of capital so it will change based on what the allowed ROE is. So we use our actual capital structure, use our actual cost of debt and our approved cost of equity. So it can change based on financing that occurred during the year.

Also if we do have short-term debt on our balance sheet -- if we're using short-term debt that will affect the ratio also because that first gets applied to the AFDC calculation. So, (multiple speakers) got all (inaudible) formula pretty well-defined. If you want to get the details about that formula, Bill can get those to you offline.

Happy to follow up. Last question -- when -- the AMI process what is your view or what is the risk in terms of AMI potentially not being approved by the regulator?

Well we always feel better when we actually hear from the regulator but so far the process is going well and we really do expect to hear any day on it.

Vikas Dwivedi, Morgan Stanley & Co. Inc.

A question on the hydro as well. When hydro output is being displaced by another fuel is it almost exclusively gas?

Generally speaking, yes. That's what's on the margin and that's we go to the market to purchase.

And roughly how often or what percentage of the hours is gas on the margin in that region?

Pretty much all the time. I mean it is -- it's using the market heat rate, the market heat rate times the gas prices and the heat rate can fluctuate anywhere from a low of 7000 to a high of 10,000 just depending on what loads are doing. Other than the spring months where you get big runoff it's usually gas on the margin. In May, June, July depending on when the snow starts melting then you can go to much lower prices because of excess hydro.

How are things right now? If you could just spend maybe a minute on the pecan mechanism as it applies to the hydro versus gas output and how that flows through again just as a quick reminder.

As you recall, there is a [dead band] at $14 million on the good side, $20 million on the downside. We're still within the dead band through the first quarter so we just track that on a quarter to quarter basis and if we go through the dead band and we start booking the deferral based on where we are. So we calculate at the end of each quarter where we are and if we have broken through the dead band then we will start booking a deferral, either a collection or a refund to customers depending on what is happening. So at least through the first quarter we're still within the dead band. That is what you're asking.

Absolutely, thank you. Then the other part of that was just how are things right now with respect to the hydro versus gas?

Right now gas is still on the margin. Some of the hydro is just starting to show up and as the weather warms we expect to see little bit more. But everything is real late this year but we do expect to through the rest of the quarter see that hydro start to flow and what we would normally expect to see just a little bit later in the year, prices go down and display some of our operating [plans].

Got it. Very helpful, thank you.

James Bellessa, DA Davidson.

The period of April [Avista] tells us that their April hydro generation was below normal. Would that have been that same case for you?

We have not looked at the numbers to know for sure but for the whole timeframe our hydro was lower than normal and I don't know -- we're different than [a Vista] system because of where our water comes from.

Peggy, when you said the whole timeframe do you mean the March quarter or do you mean the January April period?

January April period.

Now if you're saying you're going to recoup most of the earnings drag from low hydro generation in the first quarter later in the year, would that typically be mostly in the second quarter. When do your rivers get back to normal conditions?

Yes, probably second and third quarter is when we would expect to see that.

So you think some of the benefit could flow into the third quarter?

Yes.

Depends on the temperature. We have had it come as late as August if it stays cool through the May June timeframe and it comes off later. A lot of the just depends on the temperatures up in the Canadian area as well as up in Oregon.

And how much they pond and how it comes through.

How much is dependent upon moisture yet to arrive?

Very little. In fact, it arrived much later -- clear into a later timeframe this year but it's pretty much stopped now. But it did come later this year, lots later this year.

(inaudible) rains during the spring and early summer.

It's really more the snowpack that makes more of the difference. We have some run of river that is impacted by the rain but really it's more the snowpack.

On the BPA credit that you talked about, a partial benefit between now and I guess it was April and October, how much is it.

$43 million will be collected.

We collected -- (inaudible) gave us a check for $43 million. We put that in the balancing account. We had some money that a customer owed us. I think it was around $9 million. So we offset the 43 with the 9 and then as Peggy mentioned we have the rate reduction to start amortizing that over a period of time at -- I think the 6.3% rate reduction.

And you settled whereas your neighboring utility did not settle. Why did you settle and they did not?

Basically, working with the public utility commission, they thought that we should settle and that (inaudible) should not settle and I think theirs basically had to do with agriculture customers and what was going on there.

How about (inaudible) for '08 effects during the quarter?

Jim will talk about SB 408.

SB 408 during the quarter and based on an annual forecast and this obviously can change each quarter but based on an annual forecast we booked about a $2 million refund pretax for Q1 2008 and then last year we had a $1 million collection pretax -- we booked a $1 million pretax collection from customers. So the delta between first quarter last year and first quarter this year is about $3 million pretax. And that can change obviously based on power costs and what happens with the overall cost structure during the year as well as revenues. We try to make an estimate at the end of each quarter based on a full year forecast and then we adjust that each quarter.

And then I see it didn't show up in the revenue amounts. You typically have that in your revenue figures and when you publish a Q. NBut it showed up in the cash flow amount you had a SB 408 deferral of $3 million. Is that what you just talked about or is that something different?

That is what we just talked about, $3 million.

Do you want to talk a little bit about how we changed our reporting format?

Sure, we did change our financial statements this year to be more traditional kind of the way most companies report. We historically reported our financials based on the way most utilities have done but trying to transition and get ready for new FCC requirements for publishing our financial results we did change the overall formats of our income statement and our balance sheet to be more like traditional companies. We did that this quarter and we're pretty pleased with that. So you're seeing a little bit different presentation but that SB 408 deferral, what you're talking about is what you're seeing there.

You indicated that you had a January 1 rate decrease, slight decrease of 0.3% or changes that that were forecasted for 2008 power and fuel costs. Do you have any regrets about your forecast now that you got into the year?

No, not at all. That's all set going in and it's determined by a regulatory process and we plan ahead for our power purchase a year ahead so that's all set in there and we will do the same thing going into next year.

Again to remind you, we lock in 95% of our open positions. So the rates reflect pretty much our cost at that point in time other than the small piece that we may be open or longer or shorter in each month. But generally we're pretty well hedged going into the year so it's going to be an issue for us next year but at least this year we're fine.

The Boardman credit that came in last year you say it was $20 million but I recollected $0.30 per share impact. What's the difference between the $20 million credit and the $0.30 per share. Can you review that with us?

A couple of things. First of all, the full deferral was $26.4 million. We booked a $6 million deferral in the fourth quarter of 2006 and then we booked a $20.4 million remaining portion of that deferral in the first quarter of 2007. And then you have to add on that regulatory interest from the time we filed the deferral. And depending on which quarter you're in that accumulates each quarter at our composite cost of capital.

And I think in 2007 we made a pretty big catch-up. I think it was around $5 million? Yes, it was about $5 million in the first quarter 2007 for regulatory interests. So those are the three components. You have the fourth quarter deferral, the first quarter deferral plus the interest on the regulatory deferral and we continue to book that interest until such time as we amortize it and receive cash from customers.

And then earlier you indicated how much the annual MW -- average annual MW from hydro was supposed to be and you said you could figure out what the quarterly estimate was. Do you have that now?

I will do it right now and (inaudible) answer your questions and then I will come back.

We do new know we were 156,000 MW hours below our forecast for the quarter.

156,000 MW hours.

Yes, below our forecast for the quarter.

In the press release that calculates to 14% below normal?

Correct.

(OPERATOR INSTRUCTIONS) Michael Lapides, Goldman Sachs.

Two questions. First of all where are you in the process of signing an EPC contract for the Boardman's environmental control? That's one and two what are you seeing in terms of prices of coal delivered at Boardman?

In terms of the process, we are a ways from doing anything with an engineering construct at Boardman because we have to complete the BART process and so we're still working through the completion of the Boardman BART process and we don't expect that to be completed until the 2009 timeframe. And at that point time we would have a better sense of what we would need to do.

We're out talking to some engineering firms now to get estimates to look at the range of possibilities because we will need to include some numbers as we go through the lease costs plan. Our estimated 2008 market price for coal is in the range of $11.00 to $11.50. That's just the coal, not the transportation.

How different is the -- how substantial is the transportation as a percent of the total delivered cost?

I think it's about 50%, isn't it? (multiple speakers) At least 50%.

So kind of all in in the $25 range roughly?

Why don't we get back to you on the exact number on that? (multiple speakers) you (inaudible) for Michael.

We have no further questions in queue.

I would like to answer that question back to Jim Bellessa. On the MW hours for kind of our annual forecast is about 1,386,226 MW hours for the quarter. That is the baseline with just kind of average hydro. We were down 156,310 MW hours.

We have no further questions in the queue at this time. I'll now turn the call back over to Miss Fowler.

Thank you everyone fear interest in Portland General Electric Company and we invite you to join us when we report on our second-quarter 2008 results. If you have any additional questions please contact Bill Valach who will be available after this call and again thank you for participating.

This conclude your conference call for today. You may now disconnect your lines.