Portland General Electric Co (POR) 2008 Q3 法說會逐字稿

Good day everyone and welcome to the Portland General Electric third quarter 2008 conference call. Today is Thursday, October 30, 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. Please go ahead, sir.

Thank you and good afternoon, everyone. We are very pleased that you are able to participate with us today.

Before we begin our discussion this afternoon I would like to make our customary statements 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. The Form 10-Q for the third quarter ending September 30, 2008 is available 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 third 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 $0 for the third quarter ending September 30, 2008 compared to $20 million or $0.32 per diluted share for the third quarter ending September 30, 2007.

With me today are Peggy Fowler, CEO and President, and Jim Piro, Executive Vice President of Finance, CFO and Treasurer. Peggy will begin the call with an overview. Jim will then discuss in more detail our third quarter results and then we will open the call up for questions. And so it is my pleasure to turn the call over to Peggy.

Thank you, Bill. Good afternoon and thank you for joining us today. I know that the last several months have been very busy for those of you in the financial industry and we do appreciate your time.

Before we begin reviewing Portland General Electric's third quarter earnings I want to let you know how the credit crunch and economic downturn are impacting PGE. Like all companies we are closely monitoring developments in the financial markets so we can respond appropriately.

The availability of credit is important for funding our capital expenditure program and ultimately, serving our customers with reliable and safe electricity. At this time we believe we will have adequate access to capital for 2009 and 2010. Jim will talk more about that later in the call but I wanted to mention it up front as liquidity and access to capital is on everyone's mind.

I want to also say congratulations to Jim Piro. As you may have read, the PGE Board of Directors has appointed Jim as the next CEO and President of PGE. I will be retiring as CEO on March 1, 2009. This has been a difficult decision for me, one I have contemplated for a while. I've deeply enjoyed my career at PGE and feel blessed to have worked with such a fine, dedicated group of people over the years. But I know the timing is right. PGE has achieved independence; we have put many major issues behind us; we have built a solid foundation for growth and we have a strong executive team in place.

I have worked with the Board of Directors on a succession plan that allows for continuity of leadership and a seamless transition that allows PGE to build on our successes. I'm very pleased to turn the reins over to such a capable leader.

Jim and I have worked closely together over the years. Jim's extensive management experience within the company and his equally strong financial capabilities make him the clear choice to lead PGE and our dedicated employees. He will be a visionary chief executive with a strong focus on delivering value to both customers and shareholders. And I look forward to continuing to be engaged in PGE's strategic direction as part of the Board of Directors as well as being actively involved in other business and community endeavors.

Now let's move on to third quarter results.

During today's call we will describe how our solid operations during the third quarter provided value to customers and shareholders; update PGE's earnings guidance for 2008 and initiate guidance for 2009; discuss earnings for the third quarter and provide an update on the Trojan refund order; and review PGE's progress in investing to meet customer needs, which drives customer satisfaction and growth in earnings for our shareholders.

Let's begin with earnings guidance. We are updating our full year 2008 earnings guidance to $1.40 to $1.50 per diluted share from our previous guidance of $1.85 to $1.95 per diluted share. This decrease is primarily due to the Trojan refund order and a decline in the fair market value of the non-qualified benefit trust asset. I will discuss the Trojan refund order in just a minute.

PGE is initiating 2009 earnings guidance of $1.80 to $1.90 per diluted share. Guidance is based on normal hydro conditions and plant operations. For the long-term we continue to expect our annual earnings growth to remain at 6% to 8%, which will support continued growth in our dividend.

On October 29 PGE's Board of Directors authorized a payment of a quarterly dividend in the amount of $0.245 per share payable on or before January 15, 2009 to shareholders of record as of December 26, 2008.

Now let's turn to the third quarter. We had solid operating results with increases in both the number of customers and total retail energy deliveries and our generation plants ran well. There were however, some key items that impacted financial results for the third quarter including the Trojan refund order and related Senate Bill 408 impacts; the decline in the fair market value of non-qualified benefit trust assets; and the positive impact of oil sales at our Beaver plant.

While Jim will provide more detail on these items I would like to provide some background on the Oregon Public Utility Commission's Trojan refund order. On September 30 OPUC ordered PGE to refund $33.1 million to customers. The refund relates to amounts PGE collected under OPUC-approved prices on the unrecovered balance of our investment in the Trojan plant.

We have [accrued] the refund as a regulatory liability which is reflected as a reduction in our third quarter revenue. I can appreciate what a tough challenge the commission faced in sorting out 13 years of multiple regulatory proceedings and lawsuits. Throughout those years PGE followed the OPUC's orders for Trojan cost recovery and were pleased they have determined that the company's prices were just and reasonable.

While we are disappointed with the refund order and its impact on third quarter earnings, PGE, our investors and our customers share a common interest in seeing Trojan cost recovery issues resolved so that we can focus our attention and meeting customers' future needs.

Now I would like to talk a little bit about Oregon's economy. Total payroll in Oregon fell 0.3% in the third quarter driven by job losses in the construction and wood products industry. The US also saw a 0.3% decline during the third quarter. However, when you look at the first nine months of 2008, Oregon payroll growth was above the national average as it gained 0.3% as 0.1% for the United States. The current business cycle impacts Oregon as it does the United States, but we believe Oregon's long-term fundamentals such as demographics and location attractiveness and the emerging solar sector will help stabilize the Oregon economy.

PGE continues to see growth in our operating area. Total customers served increased by 1.3% to approximately 814,000 as of September 30, 2008 as compared to approximately 804,000 as of September 30, 2007. And we project an approximate 1.05% increase in weather-adjusted retail loads for 2008 with higher use fire industrial customers in the fourth quarter offset by slower residential customer growth. Emergence of solar cell manufacturing in Oregon and in-migration are expected to boost energy deliveries in the fourth quarter and help provide support for Oregon during this economic cycle.

In 2009 we project a 1.9% increase in weather-adjusted retail loads on similar fundamentals particularly from new large industrial loads. It is those solar manufacturing companies that continue to be a bright spot and the extension of the investment tax credit for solar energy and fuel cell properties should help support this industry.

In September, SANYO Solar announced plans to build a new $80 million plant at our operating area. This facility will produce silicon ingots and splice the material into wafers for solar cells. With completion slated for fall of 2009, the factory is expected to employ 200 workers. SANYO Solar and other companies such as Spectra Watt, SolarWorld, [SolaSys] and XsunX, which also have facilities in our operating area, are reinforcing the solar cluster which emphasizes Oregon's reputation as a center for electric power reliability, sustainability, and clean technology.

Last quarter I was pleased to announce our partnership with the Oregon Department of Transportation to develop the nation's first solar highway project. And now we're building on that momentum. PGE recently invested in the largest solar project in the Pacific Northwest. The project, which uses state of the art thin film solar panels, is being installed on the rooftops of three distribution warehouses in Portland. The solar panels will cover more than 328,000 square feet and are expected to have an installed capacity of about 1.1 megawatts when completed by December 2008.

We have also been working with local businesses and governments to install plug-in vehicle charging stations to (inaudible) the transportation infrastructure needed for plug-in vehicles. We anticipate the charging stations will help accelerate the adoption of the next generation of electric vehicles which are scheduled to hit the streets in 2010.

It is these types of innovative projects combined with our commitment to operational excellence and customer service that drive PGE's customer satisfaction. Third quarter independent survey results show that overall satisfaction among residential customers has risen to the highest level in a decade. Overall satisfaction remains in the top quartile for key customers and in the top decile for residential and general business customers.

The price of electricity is an important aspect of that customer satisfaction. That is why we take any requests for a price increase very seriously.

Jim will go into detail about our 2009 general rate case in a few minutes. Before he does that, I want to emphasize our company's commitment to cost efficiency. We know the current state of the economy and rising costs are major concerns for our customers, and continuing to provide reliable and reasonably priced electricity is a priority for us. At PGE we work hard to make our business as efficient and cost-effective as possible while also maintaining a high level of customer service and system reliability.

Now I would like to provide you an update on a few key items that demonstrate our commitment to operational excellence.

Our diverse generation portfolio has performed well. The availability of our plans during the first nine months of the year, including thermal, wind, and hydro was approximately 88% with thermal at 83%, wind at 93%, and PGE-owned hydro at 100%. Current forecasts indicate near normal hydro conditions for 2008.

On the renewable generation front, Phase I of Biglow Canyon Wind Farm is operating well. Construction of Phase II is proceeding on schedule. Most of the roads are in place and work has started on the foundation. The turbines will start arriving in April and we are on track for Phase II to be finished in late 2009, which means our customers will benefit from the extension of the production tax credit for wind projects. Phase 3 is expected to be completed in 2010.

We estimate that the combined cost of Phases 2 and 3 to be approximately $730 million to $770 million including AFDC. The three phases of the project are expected to have a combined total capacity of almost [415] megawatts.

In April we issued a request for proposals seeking up to an additional 218 average megawatts of renewable resources. We have received 38 responses to that RFP. The majority of these proposals are for wind projects and include both ownership and purchase options. We expect to identify a final short list by the end of the year and begin negotiations shortly thereafter.

These renewable resources were part of our 2007 integrated resource plan. And as requested by the OPUC, we are currently preparing a 2009 integrated resource plan which will include additional longer-term analysis to address resource decisions beyond 2012.

The potential effects of federal climate change policies and uncertainty around fuel prices and load projections will be taken into consideration as we draft this plan. We expect the 2009 integrated resource plan to further define PGE's energy and capacity needs and we will submit our draft plan to the OPUC by August 2009.

And as part of our 2009 integrated resource plan, we are currently performing an economic analysis to evaluate the capital expenditures needed to retrofit our Boardman plant with emission control. We are committed to meeting environmental standards and reducing emissions from Boardman, which is a key part of PGE's diverse mix of energy resources.

In November 2007 PGE submitted to the Oregon Department of Environmental Quality a responsible, cost-effective solution for new emission controls that would meet the requirements for best available retrofit technology. We proposed aggressive actions that would cut actual haze-causing emissions by approximately 65% in about five years.

In August 2008, Oregon DEQ released its preliminary proposal that would require additional controls at the Boardman plant in three phases with completion between 2011 and 2017. The proposal includes the installation of selected catalytic reduction in the final phase.

DEQ is expected to issue a draft rule in December 2008. The Oregon Environmental Quality Commission is expected to adopt a rule in April 2009 after the appropriate public process has been completed. The rule will be submitted to the Environmental Protection Agency for approval as part of the Oregon Regional Haze State Implementation Plan. The company expects the EPA to issue a decision in early 2010. While we will submit our draft integrated resource plan to the OPUC in August 2009, the OPUC's final approval of that plan will not come until early in 2010, which provides us the opportunity to make adjustments as needed based on the EPA decision.

And finally, a brief update on our Smart Meter project. We are currently in the systems testing process of installing 16,000 new Smart Meters for residential and commercial customers. By the end of 2010 we expect the project will be completed with a total of approximately 850,000 meters. The Smart Meter project is another good example of how we're constantly looking for ways to serve our customers more efficiently. By 2011 we expect to see approximately $18 million in annual operational savings.

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

Thank you, Peggy, and good afternoon, everyone. First let me say I'm extremely honored to be entrusted to lead our dedicated and talented employees who are committed every day to making PGE a great company. When I become CEO and President, I will continue to advance the strategies that Peggy and our executive team have put in place. My co-workers and I will continue to focus on delivering value to our customers, our community, and our shareholders by providing safe, reliable and reasonably priced power.

Peggy is an amazing later and a true friend. I am pleased she will continue to actively participate in PGE's strategy as part of the Board of Directors.

Third quarter operating results were solid excluding the impact related to the Trojan refund order. PGE's net income for the third quarter 2008 was $0, compared to $20 million or $0.32 per diluted share for the third quarter of 2007. This decrease was primarily due to a $20 million after tax provision related to the Trojan refund order.

Also contributing to the decrease was a $7 million after tax impact of an increase in estimated customer refunds pursuant to Senate Bill 408, primarily due to the Trojan refund order. Third quarter 2007 results were positively impacted by Senate Bill 408 with an after tax gain of approximately $3 million versus a $4 million after tax loss in the third quarter 2008. PGE also experienced a decrease of $3 million after tax from a decline in the fair market value of non-qualified benefit plan trust assets with a $500,000 after tax gain in the third quarter of 2007 versus a $2.5 million after tax loss in the third quarter 2008.

Results were offset by a 3% increase in retail energy deliveries and an approximately $2 million after tax gain on fuel oil sales from our Beaver plant. Also through the update of the PCAM for the annual earnings test, customer refunds of $6 million booked in the first half of 2008 were reversed.

During our last two quarters' earnings calls, we have discussed the impacts of hydro conditions on our financial results. Here is a brief summary of each quarter.

In the first quarter of 2008 hydro production was down due to colder temperatures and a resulting delay in snowmelt compared to our forecast of normal hydro conditions. The financial impact was approximately $6 million after tax or $0.10 per share. In the second quarter we had an increase in hydro production, but as a result of lower market prices we realized a recovery of only approximately $2 million after tax or $0.03 per share.

In the third quarter hydro production was near normal and we expect near normal hydro generation for the remainder of the year. As a result, for the full year we expect hydro conditions to have a negative after tax impact of approximately $4 million. This cost is one element in our overall power cost and the power cost adjustment mechanism.

Now a brief update on the power cost adjustment net mechanism. As a result of an increase in projected customer refunds under Senate Bill 408, we expect our return on equity for 2008 to be below the 11.1% earnings test under the PCAM mechanism. As a result, an approximate $6 million refund provision recorded in the first half of 2008 was reversed in the third quarter with a corresponding reduction in power costs.

Now I would like to update you on a few key items. First, a general rate case. In February we filed our 2009 general rate case based on a 2009 forward test year. During this regulatory process PGE, the Oregon Public Utility Commission staff and the interveners have reached settlement agreements on two major items -- the cost of capital and net variable power costs.

The cost of capital stipulation is for a 10.1% return on equity and a capital structure of 50% debt and 50% equity. The net variable power cost stipulation covers a number of modeling and other adjustments which resulted in an approximate $5 million downward adjustment to the forecast of 2009 net variable power cost.

In addition to the stipulations, PGE removed the selective water withdrawal project at our Pelton Round Butte plant from the 2009 general rate case. This project will be brought into rate base when it goes into service in mid-2009 through its own separate regulatory filings. PGE's share of this project, including AFDC, is approximately $78 million.

Including these stipulations and the current net variable power costs forecast, PGE's proposed revenue requirement increase is $161 million consisting of $104 million for power costs and $57 million for other costs. We believe that with the addition of certain customer credits including those related to 2007 results of PGE's PCAM, the total average price increase for customers will be approximately 8.4%.

We continue to work with all parties on remaining items and we expect the commission decision by year end with new prices expected to go into effect on January 2009.

Now I will provide you an update on PGE's capital expenditures. For 2008, capital expenditures are expected to be approximately $401 million including $98 million for Biglow Canyon Phases 2 and 3. During 2009 capital expenditures are expected to be approximately $760 million including $414 million for Biglow Canyon Phases 2 and 3. Our news release and 10-Q provide a more detailed listing of our capital expenditures.

PGE has significant capital funding requirements and 2009 in 2010 and we believe PGE continues to have the ability to obtain funding for our capital projects. We also believe that the availability of funds under our unsecured credit facility, our expected ability to add additional short term credit capacity, and the ability to issue long-term debt and equity in aggregate gets provide sufficient liquidity to meet capital expenditures and other operating requirements.

PGE has an unsecured $400 million multi-year credit facility provided by a syndication of banks. Lehman Brothers, representing $55 million of the credit facility -- and $25 million of the Lehman Brothers share was assigned to Sumitomo Mitsui Banking Corporation. We are in discussions with another financial institution for the reassignment of the remaining $30 million.

As of October 24, PGE had approximately $179 million of available borrowing capacity under this facility plus $20 million of cash. To finance PGE's capital expenditures and maintain a 50-50 capital structure, we plan to issue approximately $300 million of long-term debt and $230 million of equity in late 2008 or during 2009. Furthermore, we expect to re-market $142 million of tax-exempt bonds which have a mandatory tender date in May 2009.

We continued to maintain investment-grade bond ratings. Our senior secured ratings are Baa1 at Moody's and A at Standard & Poor's. The outlook for PGE and both agencies is stable.

The focus of our financial objectives continues to be our core utility business. This includes sufficiently 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. As a well managed, vertically integrated, regulated utility, PGE has the opportunity to make strategic investments that meet our customers' needs as well as provide long-term earnings and dividend growth for shareholders. PGE's business strategy builds on our strengths as an excellent operator of business focused on serving our customers within our growing compact operating area. We continue to be a well capitalized company with a strong balance sheet and investment-grade credit rating.

During the third quarter we made solid progress on several key projects, construction is well underway on Phase 2 of Biglow Canyon and our thermal operations remain solid. We continue to work toward an expected commission decision on our 2009 general rate case by the end of December. Although we are disappointed with the amount of the Trojan refund order, we are pleased moving ahead in resolving this complex issue. And we initiated 2009 earnings guidance of $1.80 to $1.90 per diluted share.

As we look to 2009 and beyond, I'm confident that under Jim's steady leadership PGE will continue to focus on ensuring we have the capital needed to grow our business by investing in generation, transmission and distribution to ensure long term reliability for our customers.

I am looking forward to seeing many if you at the EEI conference in a few weeks. Over the last several years I have certainly enjoyed meeting with you, the financial analysts and investors.

Thanks again for joining us today and now I would like to turn it back to Rachel for questions.

(Operator Instructions) Steve Gambuzza.

On the RFP for the wind, I was just wondering would -- you mentioned you're going to announce a short list at the end of the year and that you would make final selections in January. Is -- it's for 218 hours megawatts. Would this be generally capacity that would come online in the 2012 timeframe? Or might a good chunk of it be pushed out further than that?

Well, it will depend on the projects we select. Certainly some of those will have the capability of coming in in that timeframe. And we will have to make the decision around whether or not we purchase contracts on some of these, or some of them may end up being ones that we decide to build out ourselves too. But our goal is to do that within that 2012 timeframe.

And then you mentioned there was -- well, you discussed the rate case, that there was a certain investment you are making. It is going to come online in mid-2009 and that has now been stripped out of the rate case. But you are going to be able to get a rider treatment from that -- is that correct?

It is selective water withdrawal, which is part of our Pelton Round Butte relicensing project. Jim, do you want to talk about the details on that?

Because that was such a large project and a very complex construction project, we weren't sure exactly when it was going to go into service. And the parties were uncomfortable just picking a date and saying that is when it is going to come into service. So the collective parties agreed the better treatment would be to track that in separately with a separate rider when it goes into service. And right now we are looking at around -- sometime in the May timeframe for that project to go operational.

So we have actually just made the filing. It is on our website. You can get all the details and we will start working through that case with the assumption we get a case -- the prudency review completed and the rates would go into effect when that project goes into service.

And staff is on board with the rider treatment for that?

All the parties have agreed to that process. And hopefully we can get through the process so we can get those rates effective when it goes into service.

And finally, in terms of de-coupling, is that something that has been -- is there a stipulation on that? Or is that still one of the items that has not been agreed to with (multiple speakers)?

Decoupling is still one of the items that has not been agreed to.

(Operator Instructions). Hasan Doza.

Just had a couple of questions. Wanted to just confirm the timeline for Boardman emissions project. As you mentioned, if I read you correctly, if you get all of the approvals by 2010 is it okay to assume that you will start to spend the meaningful dollars starting in 2011 and then go on for the next six years?

Yes, there is a long process involved here. And it will depend on what decisions are finally made in accordance with DEQ and EPA on what we finally end up doing. Jim, do you have is scheduled there? The longer timeframe I think is what DEQ has currently proposed. If we were able to make progress on our proposal, it could be done in the shorter timeframe of investment.

The complexity is which plan we end up with. The DEQ proposal is a three-phase project where we first put in low NOx burners by 2000 -- I think it is 2011 -- 2011. And then we put the mercury controls, the scrubbers and the baghouse in 2014. And then the selective catalytic reduction system would go in by the end of 2017.

So it goes in chunks. That is what the DEQ has proposed. But we will have to wait to see what the final proposal is and what is adopted. So you can see, depending on our proposal, as Peggy mentioned, is much more accelerated. The DEQ proposal is a little bit more paced out in terms of timing. And the SERs are a pretty expensive item which will probably be in that '16, '17 timeframe.

Actually that's helpful. Jim, do you have any thoughts as to any cash contribution you guys are meaning to make for your pension for 2009?

We, like other pension plans, have taken losses because of the downturn in the equity. There is the Pension Protection Act which governs when you need to put capital into the plan. A lot of it will depend on how the plan assets perform over the last couple of months. And there is some discussion under way around maybe relaxing the terms of the Pension Protection Act.

We are looking at it pretty closely but we not ready to disclose yet what the number is because the markets are so volatile and what's going on. That's where we are.

By the end of the fourth quarter we will know exactly where we are and whether we are going to have to fund it -- whether the Pension Protection Act is going to get any waiver on their provisions in terms of where we have to get on funding levels.

But as you recall at the end of last year we were well funded. But we have, like all other pension plans, taken losses on the equity side. We are about 70% equity, 30% fixed income.

Jim, one last question for you on the 2009 earnings range. Would you be able to give a little more sensitivity in terms of what did you guys assume in terms of the timing of the equity? I know you guys gave a range of between late '08 to '09. In your guidance of $1.80 to $1.90, did you to assume an '08 issuance or an '09 issuance?

We assumed -- we issued the equity when we think we needed it in the forecast. Now when we actually issue is really dependent on the market conditions and when we are comfortable with the price of our stock. I think the important thing is taking advantage of the market when we think our stock price is appropriate. And we're not going to give you a date at this point. In terms of projections, it is not that material to the overall results.

And there are no questions in queue at this time.

We will close out. We appreciate your interest in Portland General Electric and invite you to join us in a few months when we report on year end 2008. If you have any additional questions please contact Bill Valach, who will be available after this call. Thanks again for joining us today.

This concludes today's conference call. You may now disconnect.