Portland General Electric Co (POR) 2011 Q2 法說會逐字稿

Welcome to Portland General Electric Company's second quarter 2011 earnings results conference call. Today is Friday, August 5, 2011. This call is being recorded and, as such all, lines have been placed on mute to prevent any background noise. After the speaker's 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, Nancy, and good morning, everyone. We are very pleased that you are able to join us today.

Before we begin our discussion this morning, I would like to make our customary 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 facts 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 to 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's.

The Form 10-Q for the second quarter 2011 was available this morning at our website 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. This Safe Harbor statement should be incorporated as part of any transcript of this call. Portland General Electric's second quarter earnings were released before the market opened today and the release is available at portlandgeneral.com.

Leading our discussion today are Jim Piro, President and CEO, and Maria Pope, Senior Vice President of Finance, CFO and Treasurer. Jim will begin today's presentation by providing a general overview of the quarter's results and our strategic capital projects. Then, Maria will provide more detail around the quarterly results and key regulatory proceedings. Following prepared remarks, we will then open the lines up for your questions.

And now I would like to turn the call over to Jim.

Thank you, Bill. Good morning and thank you for joining us. Welcome to Portland General Electric's 2011 second quarter earnings call. We delivered strong operations during the second quarter with a continued increase in energy received from hydro resources combined with low-cost purchase power we were able to effectively manage our power supply and economically displace a significant amount of our thermal generation. I'm proud of the excellent work accomplished during the scheduled maintenance outages at two of our thermal plants. Our T&D system performed well and we continue to maintain high levels of customer satisfaction.

In addition to strong operations, I'm very pleased with the significant progress we have made on regulatory and legal matters. We have achieved a positive resolution concerning Senate Bill 408. We made major progress towards implementing our Boardman 20/20 plan and, finally, I am pleased with the progress that PGE, the Sierra Club and other environmental groups have made towards resolving a lawsuit related to Boardman filed in 2008. The positive outcomes on these matters reflect the constructive process between PGE, customer groups, key stakeholders and other utilities and the results will create value for our customers and shareholders.

For the second quarter 2011, PGE's net income was $22 million or $0.29 per diluted share compared to $24 million or $0.32 per diluted share for the second quarter 2010. We are reaffirming our full-year 2011 earnings guidance of $1.90 to $2.05 per diluted share.

Now, I will provide you an update on the economic outlook in our operating area. We continue to experience customer growth with the addition of 3,000 new customers since the second quarter of 2010. Oregon's seasonally adjusted unemployment rate continued to decline and for June was 9.4% for the state and 8.8% for the Portland metro area. This compares to the US average of 9.2%. Oregon's economic recovery continues as Oregon's payroll grew 2.7% annualized in the last six months versus 1.2% for the US.

Total retail energy deliveries on a weather adjusted basis increased approximately 2% compared to the second quarter 2010. While we experienced increases in deliveries across all customer segments, the increase in load was driven primarily by the industrial sector. We project that weather adjusted retail energy deliveries for 2011 will be approximately 1.8% above 2010 levels, including the anticipated effects of energy efficiency measures. However, when you exclude the load growth of two large industrial customers in the paper sector, weather adjusted retail energy deliveries for 2011 will be approximately 1% above 2010.

It is important to keep in mind that a few of our large customers are able to access the wholesale energy markets directly through PGE. So their production levels can vary widely based on their market opportunities.

Now an update on our strategic initiatives starting with operational excellence. We continue to deliver excellent operating performance company wide. Our distribution reliability metric remains strong and generation planned availability was high.

We successfully performed extensive work at our Boardman and Coyote Springs thermal plant during their scheduled maintenance outages. We continue to make progress on the Boardman 2020 plan to address new regional haze requirements. We replaced the plant's burners which are expected to reduce nitrogen oxide emissions by more than 50%. In addition, we installed emission controls that are expected to remove 90% of the plant's mercury emissions.

To date, PGE's portion of the capital spend on the Boardman emission controls project is approximately $17 million. The total cost of all of the emission controls is estimated at approximately $60 million, excluding AFDC. At the Coyote Springs plant we upgraded the gas turbine, increasing the plant's output by 12.1% and improved efficiency by 3.7%. I am extremely pleased with the results of both of these projects which are on time and on budget.

We continue to maintain high levels of customer satisfaction. Based on second quarter results, we ranked in the top decile for residential customers and the top quartile for general business and large industrial customers. Recently, J.D. Powers ranked PGE third in the nation for overall satisfaction in the 2011 electric utility residential customer satisfaction study.

Our leadership team continues to put a special emphasis on operational improvements and sustainable cost efficiencies for the long-term. We are meeting early milestones on a number of initiatives already underway. These targeted projects are focused on streamlining operations by leveraging technology and improving work processes in order to increase the value of the service we provide to our customers while reducing our costs.

Now I will move on to the progress we are making in executing our integrated resource plan action plan and our future investment opportunities. Our IRP action plan which was acknowledged by the OPUC last November includes energy efficiency measures as well as the addition of new renewable resources and gas fire generation and transmission projects to meet our future retail load requirements.

To achieve the generation portion of the plan, we will conduct three separate competitive bidding processes to acquire new resources. The first bidding process is the capacity RFP which has three components. First, approximately 200 megawatts of flexible year-round peaking supply. Second, approximately 200 megawatts of winter and summer peaking supply and, third, approximately 150 megawatts of winter only peaking supply. We plan to bring these resources online in the 2013 to 2015 timeframe.

The next RFP seeks approximately 120 average megawatts of renewable resources to help meet Oregon's renewable energy standards. We plan to bring these resources online as needed to meet Oregon's 2015 renewable energy standard requirements of 15%. Finally, the base load RFP seeks approximately 300 megawatts to 500 megawatts of base load high efficiency natural gas fueled generation. We plan to bring this resource online in the 2015 to 2017 timeframe.

In each of the three competitive bidding processes we plan to include our own self-build options to compete with the market bids. The process for the capacity resources will be completed in early 2012, the process for the renewable and base load resources will likely be completed by late 2012 or early 2013.

The IRP action plan also includes our Cascade crossing transmission project. We've been working hard with other stakeholders in the region in planning the project. As we continue this process, we have adjusted Cascade crossing schedule to allow additional time for the extensive amount of work required for permitting a project of this size.

Subject to obtaining all necessary approvals, the in-service timing for the project is estimated to be between late 2016 and 2017. Once we have completed the RFP processes will have better clarity on our future equity and debt financing needs. The amount and timing of these financing is dependent on the outcome in timing of the competitive bidding processes, our Cascade Crossing transmission project, PGE's financial performance and capital market conditions.

Now I'd like to turn the call over to Maria Pope, our Chief Financial Officer, to discuss our financial and operating results in greater detail.

Good morning. Thank you, Jim. Today, I will cover financial results for the quarter, review operating performance, provide an update on key regulatory items and conclude with liquidity and financing.

Second quarter 2011 net income was $22 million or $0.29 per diluted share compared to $24 million or $0.32 per diluted share for the second quarter of 2010. Total operating revenues for the second quarter were $411 million, a decrease of $4 million from the second quarter 2010. The decrease resulted from a $9 million decrease in wholesale sales offset by an increase in retail and other revenues.

Retail revenues were up 1% or $4 million from the second quarter 2010 due to a 3% increase in retail energy deliveries which was driven by a combination of cooler than normal temperatures and decrease -- increased demand from the industrial sector -- and a $9 million increase in average retail prices largely from a 3.9% increase authorized as part of the 2011 general rate case. These are offset by an $18 million decrease related to the power cost adjustment mechanism, or PCAM, compared with a year ago.

Unseasonably cool weather led to higher energy deliveries for our residential customers. We estimate that weather resulted in a positive impact of our $0.08 per share in the quarter compared to $0.03 per share in the second quarter of 2010. Weather also had an impact on purchase power and fuel expense which decreased 9% quarter over quarter. PGE received an increased amount of energy from PGE owned and contracted hydro resources as river run off is currently at 130% of normal.

With abundant hydro in the northwest, wholesale market prices are low. As such, we economically did slash a significant amount of our thermal generation and increased market purchases. Excluding impact of the PCAM, hydro generation results in a positive pre tax impact of approximately $4 million in the second quarter compared to a negative impact of approximately $1 million in the second quarter of 2010.

Wind generation, specifically Biglow Canyon, provided 10% of PGE's retail load requirement compared to 6% in the second quarter of last year. This increase was primarily due to the completion of the final phase of our Biglow Canyon wind farm in August of 2010. Biglow was curtailed periodically in May and June due to BPA, or Bonneville Power Administration's environmental redispatch policy. While the curtailment resulted in lost renewable energy credits and production tax credits, the overall financial impact was not material.

As Jim mentioned, in the second quarter we successfully completed extensive scheduled maintenance at both the Boardman and Coyote plants which resulted in increased production and distribution expense and impacted the availability of our generating plants. For the first half of 2011 availability was 88% compared to 92% in the first half of 2010.

Now I will update you on a few regulatory items starting with our power cost adjustment mechanism, or PCAM. For 2011 the PCAM dead down range is from $15 million below to $30 million above the baseline for net variable power cost. With strong hydro conditions and low cost purchase power, actual net variable power cost for approximately $29 million below the baseline for the first six months of 2001. This compares to being $9 million below the baseline for the first 6 months of 2010.

Net variable power cost for the full year are currently estimated to be below the baseline as well as lower dead band threshold. With PGE expected to exceed its regulated earnings test of 11% return equity, we have recorded a refund to customers of approximately $12 million year-to-date comprised of $4 million in the first quarter and $8 million in the second quarter.

Under the PCAM, as we have exceeded the dead band range and are at 11% return on equity on a regulated basis, we share power cost improvements with customers. In the second quarter and through the end of the year 90% of the additional power cost benefits are refunded back to customers. [Ted Coupland] is working as we expected. With residential use up in the second quarter, we have recorded a $1 million refund compared to a $3 million collection in the second quarter of 2010.

Now we will move on to SB 408, Oregon's complex tax laws. On previous calls we spent a lot of time discussing the complexity of these laws and informed you that we would work hard to resolve the volatile and unpredictable impact to both customers, prices and earnings. After extensive collaboration with customer groups and other northwest utilities, I am pleased to inform you that SB 408 was officially repealed by Senate Bill 967 in May. This positive outcome would not have been possible without the leadership of both the utility commission and the legislature. SB 957 repeals the problematic annual true up in the analysis of when conducting rape case proceeding. For both 2010 and 2011 we had amounts will lead and there are no adjustments to the repeal.

Now a regulatory update on Boardman. Recently the OPUC approved of revelatory firing for the recovery of increased and decommissioning costs reflecting the change in the retirement age of the Boardman plan T2020. This resulted in an increase of approximately 1% of the -- effective July 1.

Now on to financing. In the liquidity we are active in the wholesale marketplace entering to forward contract for natural gas and power and minimize volatility for our customers. As of June 30 we posted approximately $174 billion in collateral for the who sell which consisted of $68 million in cash and $106 million of one letters of credit.

We have credits of $600 million revolving line spirit of which $474 million was available as of June 30. Including the addition of $72 million in cash, our total liquidity at the end of the second quarter was $546 million. While we targeted capital structure of 50% debt and 50% equity, periodically we are higher or lower. On June 30, our equity ratio was 48%.

For 2011, we estimated capital expenditures of preliminary engineering to be approximately $330 million. For 2012, we are currently forecasting in the 10-Q $270 million capital expenditures and based on the approval of projects, excluding the outcome of the RFP that Jim discussed, we are likely to spend approximately $300 million next year.

In closing, we continue to focus on financial objectives that support our core utility business earning a more competitive return on equity and a strong balance sheet to support our investment grade credit rating. Jim.

Thank you, Maria. Second quarter 2011 performance reflects our focus on operational excellence including strong power supply operations, successful execution of extensive upgrades at 2 of our thermal plants, high customer satisfaction and prudent management of our operating costs. We are moving forward with implementation of our Boardman 2020 plan as well as our IRP action plan, and we will continue to position the Company for future investment opportunities that deliver value to our customers and a competitive return for our shareholders.

Operator, we would now like to open the call for questions.

Thank you, sir. (Operator Instructions) We'll take the first question from Neil Mehta from Goldman Sachs.

Good morning. Jim, Maria, I just want to start off on the rate case timing. When do you expect to file your next rate case?

Neil, we continue to look at out years. I think right now our plan would be not to file a rate case for the 2014 test year. We would probably file in early 2013. That is based on our current projections assuming load continues to grow in the region and we don't see a backslide in the economy.

Got it. Jim, in the absence of a rate increases, how do you grow earnings in 2012 and 2013?

In terms of our earnings it's really dependent on a number of factors. First, it's load growth in the region and secondly our investment in rate base, and those will continue as we get clarity on our renewable RNR -- RFP processes. So, we will continue to look for investment opportunities to grow our earnings and that's really the model to do that. Maria, you want to add anything to that?

Sure. As we have looked carefully at the next couple of years, the backdrop I think is that we were pleased with our 2011 rate case and the recoveries that we've achieved through that. And then in Oregon, as Jim talked about in his prepared remarks, we are seeing low growth and, in particular, the Intel expansion, as well as suppliers to Intel are growing very rapidly. We are seeing construction growth actually in the trades area up about 6.8% versus a year ago. So, we have good confidence in our ability to be able to continue to grow earnings to invest for our customers over the next couple of years and to prudently manage our rates as we then add capital projects with the renewables and capacity projects probably first and then baseload energy after that, should we win the RFPs. That would probably trigger more of a catalyst for our rate case than concerns over earnings.

Got it, Maria. Do you think you can keep O&M below the demand growth?

If you look at our track record over the last couple of years, particularly on the A&G said, we have really done a good job of managing our O&M. And the increase you see in our production area most recently is a result of the maintenance outages that Jim spoke about at both Coyote and the Boardman facilities which were well reflected in customer prices. And then, also, an outage that took place at the Colstrip plant, so we have good confidence. We are doing a number of things to be more cost effective and efficient throughout the Company and leverage our investments in IP technology for the benefit of customers.

Alright. Then my last question is, is how should we think about the second half of 2011? What are the key drivers, positive and negative, to get to your guidance?

A couple of things on that. First of all, we need to continue to see the economy continue to grow. Not a backstep in that, all indications are that looks like it's going to occur. Secondly, our power plants need to continue to operate well. We are now getting to the end of the hydro season and the end of the runoff, so now it's really a matter of our power plants continue to operate well. Third, hopefully no storms or major incidences on the T&D side.

Got it. Thank you very much.

We will take the next question from Sarah Akers from Wells Fargo.

Good morning. Can you remind us which customer classes the decoupling mechanism applies to?

It applies to our residential and very small commercial customers. It's based on a use per customer calculation. For the small commercial it is based on a lost revenue calculation, about 60% of our customers qualified under the decoupling mechanism.

Okay. So, if it's just a use per customer, you will still benefit from customer growth, that will flow through?

We still benefit from customer growth and the use per customer is on a weather adjusted basis. So, we adjust the actual usage for weather and then we compare that to the last rate case. That's the majority of where the decoupling goes through. And usually the thing that affects that the most is energy efficiency, so the extent customers put more energy efficiency measures in or maybe take greater conservation measures, that is where their use per customer would go down. And to the extent they include new appliances and new uses, the use per customer would go up. That is what decoupling normalizes for.

Great. And then I just want to make sure I heard this correctly, in terms of when we will get clarity on equity and financing needs, you will probably wait until all 3 RFPs are wrapped up before you have a good sense of timing of equity and things of that nature, is that correct?

I don't think all 3, but we need to at least get the first one done on the capacity and if we are successful there, then we will have to look at equity needs and where the markets are, that is not a big project for the Company, but we will take it one at a time probably and then look at each on how best to finance them as we set ourselves up for the next RFP process.

Great, thanks a lot.

The next question comes from Andrew Weisel with Macquarie Capital.

Hi. Good morning. On the 3 RFPs, can you remind us the timing of when you expect to file the RFPs and have the decisions be finalized?

Okay, on the first RFP, the capacity RFP, that is right now before the commission for a decision. We had the briefing, last week and we are now trying to resolve a few issues that were raised in that open proceeding before the commission. Once the commission issues the decision we would immediately start the RFP for capacity and we would like to complete that by the end of this year. That is our hope. It will really depend on the commission's decision in terms of when that whole process starts. That would be the first decision and, again, we would like to get that done by the end of 2012, early 2013. To the extent we are the successful winner of the bid that we would start construction immediately and probably take us about 2 years to construct that project. The other 2 bids will start later this year or early next year depending on when we can line up our choices for competitive bidding -- or our self-build options. We will likely compete those by late 2012 or early 2013. We are in the process of just getting one done at a time. We want to try to do these in a good sequence so we don't overburden our staff, but can work through the process. That is our current plan at this point.

Alright. Great. I understand your local economy is doing fairly well relative to the rest of the country at least. Should there be a meaningful slowdown? How much of a risk that this RFP process could be pushed back, any kind of meaningful amount of time?

As you know, we are a short utility, we do not have enough generation to meet our retail load. And we have a significant capacity deficit as well as an energy deficit and we really need to address that. So, this isn't necessarily to meet additional load growth, but this is to fill the hole that we currently have as hydro contracts go away and we have been relying on the market and the market is starting to get not as robust as it used to be. So, the economy has a minimal impact on these decisions because of the significant deficit we have on both of the capacity side as well as the energy side.

Terrific. Thank you very much.

Will go next to Mike Casey from D.A. Davidson.

Good morning, guys. I wanted to come back to the earlier question your O&M. Maria, you said that a large chunk of the increase in this quarter was tied to the plant maintenance outages, is that correct?

Yes.

Alright. Does this reflect the full effect of the maintenance outages or will that be stretching into future quarters as well?

No. It reflects the full amount. In the first quarter we had about $42 million of production O&M and in the second quarter it was about $55 million. So, you can see the increase. Last year we were at about 46% during the same when we had less maintenance at the facilities. So, we expect to go more into a steady state non-maintenance expense period.

Okay. Can you remind us if you have other maintenance outages coming up in the next 18 months or so?

Well, we have them next -- in the next 18 months we do because we will probably have maintenance outages next spring also related to the facilities. Not as extensive as the significant upgrades that we made at both Boardman and in particular at Coyote this past spring.

A couple things to note on that. These maintenance outages were consistent with what we planned in the rate case and so we did a forecast that cost for these maintenance outages in the rate case. Second thing, as we look at maintenance outages in 2012, those get reflected in what is called our AUT filing and so the extent they are shorter or longer, those get factored into our power cost as we plan for next year.

I see. Alright. Thank you.

We will move next to Steve Gambuza from Longbow Capital.

Good morning. Hi. Can you hear me?

Yes.

Okay. I 'm sorry if you addressed this already, I just wanted to ask about the $8 million accrual for the PCAM that you mentioned earlier.

Sure.

Was that related to -- you took an accrual for what the expected impact of power cost was going to be for the second half of the year?

It was $12 million total for the second half of the year and $8 million for the second quarter. As we look at the power cost were very significant in the first quarter and we kept most of that in terms of the P&L. When we hit over the dead band of $15 million and then the ROE at 11%, we then begin a 90/10 sharing with customers. So, when the first quarter we expected that our refund would be for that quarter about $4 million and then $8 million in the second quarter for year-to-date total of $12 million.

Okay. I'm sorry. In the second quarter you booked $4 million -- I'm sorry, $8 million related to the second quarter and then an additional $4 million for what you anticipate will be the refund for the rest of the year?

Yes, exactly -- no. It's $4 million in the first quarter, $8 million in the second quarter, and $12 million year-to-date.

Okay. So you haven't booked anything in anticipation of what you think is going to happen in the second half?

No. We don't do that. What we do is we do look at the full year expectation around earnings and make an adjustment with regards to what we expect a refund based on that 11% ROE.

Thank you very much. Just one final question. You mentioned the RFP for the peaker is before the commission you'd hope to have it by the end of the year and then a 2-year construction period, so that would be an in-service near the end of 2013. Would you expect that will be the first resource that would be bought in the rate base, or is it possible that one of the renewable RFPs could come in before that?

I think right now our current view is the capacity resource would be the first one to come in. To extend a renewable through a bidding process was available, it didn't have to be constructed, then we would put it in place for renewable energy adjustment clause and we track that in separately. That's the nice thing about the renewables, they can be tracked in separately within the year that they come in to service. A lot of it will depend what we get out of renewable RFP, whether it is just construction or is maybe a project that is bid in that's already constructed.

Okay. Thanks very much.

(Operator Instructions)

Okay. I think that's it. Well, thank you very much for participating in the call. In closing, we continue to focus on our financial objectives that support our core utility business, earning a more competitive return on equity, and a strong balance sheet to support our investment grade credit rating. Thank you so much for participating on the call and we look forward to our future call in the third quarter. Thanks a lot.

That does conclude today's presentation. Thank you for your participation.