Portland General Electric Company CEO Discusses Q1 2013 Results - Earnings Call Transcript

May. 1.13 | About: Portland General (POR)

Portland General Electric Company (NYSE:POR)

Q1 2013 Earnings Call

May 1, 2013 11:00 AM ET

Executives

Bill Valach - IR

Jim Piro - President and CEO

Jim Lobdell - SVP, Finance and CFO

Analysts

Neil Mehta - Goldman Sachs

Sarah Akers - Wells Fargo

Brian Russo - Ladenburg Thalmann

Lauren Duke - Deutsche Bank

Maury May - Wellington Shields

Paul Risdon - KeyBanc

David Paz - Wolfe Research

Andy Levi - Avon Capital

Operator

Good morning everyone. And welcome to Portland General Electric Company’s First Quarter 2013 Earnings Results Conference Call. Today is Wednesday, May 1, 2013. This call is being recorded and 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.

Bill Valach

Thank you Vicky and good morning, everyone. We are pleased that you can join us today. And before we begin our discussion this morning, I would like to remind you that we have prepared a PowerPoint presentation to supplement the discussion today and we’ll be referencing slides throughout the call. For those of you accessing the call over the phone, the slides are available on our website at investors.portlandgeneral.com.

Referring to slide 2, I'd also like to make our customary statements regarding Portland General Electric’s written and oral disclosures and commentary, that 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 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 10Qs. Portland General Electric’s first quarter earnings were released before the market opened today and the release 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.

As shown on slide 3, leading our discussion today are Jim Piro, President and CEO and Jim Lobdell, Senior Vice President of Finance, CFO and Treasurer. Jim Piro will begin today’s discussion by providing a review of our performance in the first quarter and update of our strategic initiatives. Then Jim Lobdell will provide more detail around the quarterly results and our expectations for 2013. Following these prepared remarks, we will open the lineup for your questions.

And now it’s my pleasure to turn the call over to Jim Piro.

Jim Piro

Thank Bill. Good morning and thank you for joining us. Welcome to Portland General Electric’s first quarter 2013 earnings call. As slide 4 shows, on today’s call, I'll provide an overview of our financial and operating operational performance, give an update on the economy and our operating area, discuss the progress on our strategic initiatives and provide you an update on our general rate case. Then Jim Lobdell will give you a financial update discussing the quarter’s results and our outlook for 2013.

So let’s begin. As you can see n slide 5 our financial performance in first quarter was solid with net income of $49 million or $0.65 per diluted share. This is equivalent to what we earned in the first quarter of 2012. We are affirming full year 2013 earnings guidance of $1.85 to $2 per share.

Now into operational excellence on slide 6, we delivered excellent operating performance in first quarter of 2013. Our delivery system and generating facilities operated well with the average duration and frequency of outages in the top quartile and generation plant availability factors exceeding our goals.

Our overall customer satisfaction also remains very strong. PGE ranks in the top quartile for residential customer satisfaction and the top decile for business customer satisfaction in Market Strategy's international most recently available surveys.

We also rank second nationally for large key customer satisfaction in the TQS Incorporated annual survey. As you know we’ve been implementing new technology systems in several areas of company, including transmission and distribution, human resources, and finance and accounting to help improve processes and reduce operating cost, which are critical to our efforts to keep customer prices as low as possible in the face of increases in regulatory and inflationary cost.

Now let’s move onto slide 7 for the economic outlook in our operating area. Oregon’s economy continues to improve. We’ve seen a turnaround in the residential housing market, as well as steady employment growth in high tech, manufacturing, business services, and leisure and hospitality.

Oregon's unemployment has dropped to 8.2%, compared with 80.3% at the end of last quarter and 8.8% a year ago. The unemployment rate in our core operating area is 7.3%, down from 7.4% at the end of the last quarter and 7.5% last year. The state continues to be ranked second in the nation for in-migration which helped PGE continue to add customers.

While we’re seeing positive economic indicators, our energy deliveries in the first quarter did not reflect this improvement. Adjusting for weather and the 2012 leap day, deliveries are about flat quarter-over-quarter with declines in the residential and commercial loads offset by increases in the industrial loads. Jim will address this in more detail later in the call.

Now please refer to slide 8 and 9 for an update on our progress executing our integrated resource action plan. We are nearing the completion of the RFP processes and I will cover where we are with the four resources we are seeking.

First capacity, we will break ground on Port Westward 2, our new 220 megawatt natural gas plant this month. The plant is expected to cost between $300 million and $310 million, excluding the allowance of funds used during construction and will create up to 200 construction jobs in the area. The in-service date is currently slated for the first quarter of 2015.

Second, seasonal peaking capacity. These resources will be power purchase agreements and we are in negotiations with the bidders. Finally the energy and renewable resources; negotiations are underway to secure both of these resources from the respective final short list, which includes both purchase power agreements and PGE ownership options. We expect to announce the outcome mid-year.

The RFP processes have been thorough and we are pleased that the independent evaluator representing the Oregon Public Utility Commission confirmed that the RFPs were conducted in a fair, unbiased and transparent manner.

Let’s turn to slide 10 for an update on Cascade Crossing. PGE signed a Memorandum of Understanding with the Bonneville Power Administration in January to explore a collaborative regional solution that could provide up to 2,600 megawatts of transmission capacity. The full project scope as described in the MOU would cost at least $800 million.

The project is still preliminary and subject to reaching an agreement with BPA. The current negotiations involve complex issues, and include consideration of various transmission options. The expected scope and timing as well as the estimated cost will become clear by the end of 2013.

Now onto slide 11. As we discussed last quarter PGE filed a general rate case in February with the 2014 test year. Our filing supports an average overall price increase of about 6% starting on January 1, 2014 and includes an ROE of 10% and a capital structure of 50% debt and 50% equity.

We are currently in the discovery phase and the schedule anticipates settlement conferences with the OPUC staff and other interveners at the end of this month. Following that OPUC staff and interveners will file their first run of testimony by mid-June. We expect to complete the 10 month regulatory process in mid-December with a final order from the commission at that time.

Now I would like to turn the call over to Jim Lobdell, our Chief Financial Officer who will discuss our financial and operating results for the first quarter and review our expectations for 2013.

Jim Lobdell

Thank you Jim. Turning to page 12, net income for the first quarter of 2013 was $49 million or $0.65 per share, equivalent to earnings in the first quarter of 2012. Net income was positively impacted by reduced power costs, lower storm restoration costs and decreased interest expense. However, these items were offset by lower retail energy deliveries and higher income taxes.

Moving to page 13, total revenues for the quarter were $473 million, down 6 million for the same period last year, driven by a decrease in price and volume of retail energy deliveries. Average retail prices decreased 3% quarter-over-quarter based on a price decrease on January 1st of this year to reflect lower expected power costs.

Although retail deliveries decreased approximately 1% quarter-over-quarter, the revenue impact was partially offset by the de-coupling mechanism under which we recorded a collection from customers of $4 million in the first quarter of this year.

As Jim mentioned, energy deliveries adjusted for weather and a leap day in 2012 were flat quarter-over-quarter. During the first quarter of this year, we have seen lower than expected residential and commercial deliveries. While the high-tech industry continues to grow, we experienced decline in the solar industry, the partial closure of a paper mill and reduced usage in the government sector.

Based on deliveries this quarter, we are guiding to the lower-end of our initial load growth forecast of 0.5% to 1% over 2012 levels. As we move through the second quarter and complete our regular load forecast updates, we will provide more information on our expectations going forward.

For the quarter, purchase power and fuel expenses decreased $3 million to $192 million with a 2% decrease in the average variable power cost. Hydro generation from PGE owned and mid-Columbia hydro resources decreased 12% this quarter, compared to above average conditions a year ago.

Generation at our Biglow Canyon Wind Farm was about the same quarter-over-quarter, representing of 5% of PGE’s retail load requirement in both periods. Thermal generation increased quarter-over-quarter, accounting for 47% of PGE’s retail load requirement. Overall PGE’s net variable power costs were $1 million below the annual power cost update tariff baseline for the first quarter of this year, compared with $5 million below the baseline a year ago.

Moving on to slide 14; production, distribution and administrative cost totaled a $105 million this quarter, a slight decrease from the first quarter of 2012. While pension expense increased, we saw a lower delivery system expense as a result of no major storms in the first quarter of this year.

Depreciation and amortization for the quarter was $62 million, equivalent to the first quarter a year ago. Just as we did last year, we will continue to record deferrals for capital projects from 2011 and 2012 as a reduction to depreciation. While there was no increase quarter-over-quarter, we expect approximately $3 million of incremental deferral throughout 2013 for a total depreciation and amortization reduction of about $18 million.

Interest expense decreased quarter-over-quarter due to $100 million first mortgage bonds that matured in 2012. Offsetting these savings was a $2 million increase in income taxes quarter-over-quarter as our effective tax rate rose from 23.4% to 26.2%. This increase is largely due to lower forecasted wind generation in 2013, resulting in a reduction and expected production tax credits but was partially offset by an increase in the PTC rate.

Now on to slide 15. We continue to maintain a solid financial position, including investment grade credit ratings and strong liquidity. As of March 31, 2013; we had $681 million in cash and available credit and an equity percentage of 51.8%. On April 1, we repaid $50 million of maturing first mortgage bonds with cash bringing our equity ratio to 52.6.

We expect to issue $50 to a $100 million of long term first mortgage bonds during the second quarter to meet our cash needs. In addition we still plan to fund the construction of the Port Westward 2 unit, with cash from operations and debt insurances. Depending on the outcome of the energy renewable RFPs that Jim Piro just covered, we may access the capital markets in the near term for equity and or additional debt.

As Jim also noted, we're affirming our 2013 guidance of a $1.85 to $2 per share. As you can see on slide 16 this range is based on load growth towards the lower end of our initial range of one half of 1% over weather adjusted 2012 levels, slightly below normal hydro conditions, normal plant operations and wind generation based on an updated forecast that more closely reflects historical performance, a full year O&M expense between $440 million and $460 million, including approximately $10 million of increased pension expense year-over-year; depreciation expense between $240 million and $250 million, including a minor increment DNA reduction from the capital deferral projects; capital expenditures between $505 million and $525 million which does not include any potential expenditures for resources related to the energy and renewable RFPs, we've had capital expenditures of a $108 million so far in 2013 and finally approximately $5 million to $6 million in non-cash AFUDC for Port Westward 2.

Jim, back to you.

Jim Piro

Thanks. Our operating and financial performance for 2013 is on track and we're looking forward to continued progress on our strategic initiatives in 2013 including building Port Westward 2, selecting energy and renewable resources and completing the 2014 general rate case.

And now operator we're ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we will take the first question of the day from Neil Mehta with Goldman Sachs, please go ahead.

Neil Mehta - Goldman Sachs

On O&M you did a terrific job in the quarter there, the $105 million came in well below the $110 million to $115 million run rate that you set out on a quarterly basis at the beginning of the year. Was there anything unusual to take into consideration and is it fair to assume that you're tracking towards the bottom end of the $440 million to $460 million range that you laid out in that same guidance?

Jim Lobdell

I would say that what we're seeing Neil is just more of a timing difference at this particular point. We are gaining savings through a lot of the efforts that Jim Piro had mentioned earlier and then as we pointed out, there's little bit of improvement because of no major storms but we seem to be online for our projections for the range that we had given in guidance at this point.

Neil Mehta - Goldman Sachs

And then on hydro conditions, as you said, are slightly below normal but even in years where you’ve had slightly negative hydro, you’ve still been able to breakeven on the PKM through other components of the PKM. Do you still think that’s the case or whether the PKM impact be negative in 2013 as you look at it?

Jim Lobdell

No, I think that we are still be where we need to be. There is a lot of things, lot of moving parts going on now in the whole subpart of the marketplace this year, including a hydro dam in California is down significantly. So but we could see some improvements in the value of the holdings that we have.

Neil Mehta - Goldman Sachs

And then can you comment on the potential for you to ultimately acquire the assets that you didn’t win in the RFPs?

Jim Piro

We can't tell you. We are in the negotiations right now and when we reach the end of the negotiations we will let you know and as we mentioned it could be either purchase power agreement or an ownership option for the company. So hopefully we’ll have more to report in the next few months.

Operator

And the next question comes from Sarah Akers with Wells Fargo.

Sarah Akers - Wells Fargo

As a follow up to Neil’s last question, I know the RFP conversations are confidential, but can you tell us if it’s still a matter of identifying that winning bid or is it safe to say that the top has been identified and you are just negotiating the final contract details?

Jim Piro

The way the process works as we get the short list and we start with the one on the top of the list, based on our business judgment and then we start the negotiations and if we can reach the finish line with those negotiations within the context of the bid, then that’s what where we will execute. If we can’t then we go to the next one on the list. So we're in negotiations right now. We can’t tell you whether we're still at the top or at the bottom or where we are but that’s the process we go through.

Sarah Akers - Wells Fargo

Got it and then on sales, you mentioned that sales growth is not necessarily reflecting the improvements that you are seeing in the economy. Do you think there is just a natural lag time there or is it more of a structural issue with conservation an efficiency?

Jim Piro

When we look at, we are looking at a really harder decision, it’s a whole bunch of things going in the marketplace, the economic is still relatively fragile, people are being relatively conservative. I think we will start seeing a pickup later this year. That’s why we're watching it pretty carefully. People have instituted efficiency measures, they try to be more efficient in their operations, all those things kind of impact usage. So it is with conservation.

So it’s just a whole host of things that add to that and as businesses get stronger, we would expect to see a recovery in those sectors but there have been some changes. As Jim mentioned, one of the paper customers shut down one of their lines of operations. There are some structural changes also that are going on in the marketplace.

Sarah Akers - Wells Fargo

And then will you be able to update the rate case to reflect the downward lever wise sales expectations? Can you capture that in the test here?

Jim Lobdell

As we go through the process in the rate case, we have various options every time to what to update the rate case forecast. I think September is the time. We do it in June and I think we also do it September. So it’s a couple or three times we updated our load forecast, capital related state economic data and the latest trends in what we’re seeing in the loads themselves.

And just to recall, on the residential side that sector is de-coupled and a small portion of our commercial sector is de-coupled for specific energy efficiency measures and so if we get a wrong under residential side, either way that tends to go back to de-coupling and that change in use per customer can be due to a variety things including efficiency.

Operator

And we'll now go to Brian Russo with Ladenburg Thalmann.

Brian Russo - Ladenburg Thalmann

In the past you guys have alluded to like 100 basis points of lag for just unrecovered cost and I’m just wondering, can you give us an absolute dollar value for that, because I would assume as your rate base grows the basis point lag will decline.

Jim Piro

That's a great question Brian. You’re right in that it does change as rate base grows. Right now we’ve about a $3 billion rate basis. As we add more to rate base, then the fixed amount of disallowances will be a smaller percentage overall and the major area of disallowances I think, like corporate contribution, image advertising and some of the incentives for officers. So, those are the typical numbers. If you go back to our previous rate cases and look at that, it’s in the $13 million range in terms of what is allowed in the regulatory filings for cost recovery, and that could be little bit more or less but the major items are the ones I discussed and so you are correct, as rate base grows, then that becomes a smaller percentage of the ROE and would cause less of a drag on ROE as we go forward.

Brian Russo - Ladenburg Thalmann

Okay. And I guess on that topic, your rate base really isn’t growing with the 2014 test year. So the narrowing of that lag would probably occur in '15 after adding the Port Westward 2 plans to base rates, correct?

Jim Lobdell

Right, and that will be somewhere in the $300 million range, which will add a rate base in 2015 when that plan goes into service…

Brian Russo - Ladenburg Thalmann

And then correct me if I’m wrong but I think in the past you also had unrecovered interest costs related to some debt that falls outside of your regulatory debt of roughly $12 million. Is that captured in the lag on the corporate cost you’ve just talked about or is that in addition or is that taken care of already?

Jim Lobdell

Not that just the precision in the capital structure, I think the difference in the overall which allowed in the regulatory fillings including CUF and so some of that is timing issues and some of it just the different between the regulatory weighted cost of capital and our actual weighted cost of capital.

Brian Russo - Ladenburg Thalmann

So does that create lag in addition to that historical 100 bips of lag?

Jim Lobdell

It can’t in some cases and some other cases it may not. So I think it’s hard to really quantify that precisely.

Operator

And we’ll now go to Lauren Duke with Deutsche Bank.

Lauren Duke - Deutsche Bank

I was hoping I could get you guys to give us an update on your thoughts for timing of reaching a definitive agreement with the BPA on Cascade Crossing, just when we might be able to have a better sense of the timing as the capital spend associated with that?

Jim Lobdell

At this time point, the best we can tell is probably by the end of this year we will have better clarity on what this project going to look like. We’ve gone through various innovations with BPA on trying to look at this as a single utility project. As you recall we started with, we will the site from the Boardman are down to Salem. That project was kind of independent of Bonneville and provided us the 2,600 megawatt of capacity we thought we needed.

The regional economic continues to change and so as we’ve been working with Bonneville on a single utility solution, many factors have come into play around how we would integrate and get 2,600 megawatts of capacity.

So we’re doing a lot of transmission studies right now in corporation with BPA to figure out what are the reinforcements where the capital add that need to be made. The MOU contemplated a line that went from Coyote Springs to a new substation called Pine Grove, at which point it would interconnect with BPA.

So, we’re now trying to work through all that with the transmission planters and latest forecast of new generation in the region and trying to figure out what is the right way to plan this on a single utility basis.

So I will tell you we’re doing a lot of transmission studies and we’re in detailed discussions with BPA in how to bring this all together to create the best benefits for both BPA and our customers and do this in a single utility sense.

So our hope is by the end of this year we should have real clarity on what this project will look like, but it’s still all subject to our negotiations with BPA and reaching and agreeing with them on the right kind of split in allocation of resources.

Lauren Duke - Deutsche Bank

Okay and I guess the kind of updated thoughts on your sales forecast outlook would also potentially impact this as well?

Jim Piro

In some affect. I think this is a small blip in the curve. I still see as they are having continued economic growth we are going to need to continue to add resources and the line will provide long-term reliability. Transmission takes a long time to build and you have to look it over 20 to 30 year time horizon.

Our general view is we will continue to see demand growth throughout the region and transmission in a necessary component to meet that growing demand and our current view it's better to do it now than wait for the very last minute, just because the complexity of building transmission and so that is part of the other conversation with Bonneville is the time horizon, which we would need to add strategic assets to increase the capability of the transmission system.

So I will tell you we have got a lot of focus on it. I really appreciate what Bonneville is doing in terms of working with us on the single utility. It’s got a lot of traction in terms of other support and the environmentalist appreciate that we are trying to think about this holistically. So that is kind of where we are.

Lauren Duke - Deutsche Bank

Okay and then secondly can you just quickly quantify the impact of weather versus normal on an EPS basis for the quarter?

Jim Piro

Jim, you want to cover that one.

Jim Lobdell

Yes on a quarter-over-quarter we had about a $0.01 impact associated with that Lauren.

Jim Piro

Pretty close to normal.

Jim Lobdell

Yes.

Lauren Duke - Deutsche Bank

This year was pretty close to normal?

Jim Lobdell

Yes.

Operator

And we will now go to Maury May with Wellington Shields.

Maury May - Wellington Shields

A question for the CFO Jim. Just again on your comments on the working of the PCAM for the rest of the year, did I hear you say that a slightly below average hydro year will lead to a slightly negative PCAM?

Jim Lobdell

No, no it won't lead to a negative PCAM. We are down bit in our average variable power cost. We hedge pretty much everything that we have got going into the year. Our loads are down but at the same time, I think that the power markets are going to be picking up here as we move further into the year.

The hydro in California, as I mentioned earlier is down significantly. So I think that's going to have an impact on the Pacific Northwest but I think overall we will just be slightly lower than the baseline by about $1 million at this point. So, pretty much in line.

Maury May - Wellington Shields

Okay, so pretty much in line but really the first quarter is where you think you will stand by the end of the year?

Jim Piro

Maury, it is really too hard to project that at this point. A lot of things can change; the operation of our plan, GAAP prices in the region, California in demand, just tons of factors. So to tell you that's going to be $1 million by the end of the year, it’s just too early to make that projection.

Maury May - Wellington Shields

Okay but you are looking at it being pretty close to in balance I guess.

Jim Lobdell

We are looking right now, but as Jim pointed out, there is a lot that can change between now and the end of the year.

Maury May - Wellington Shields

Okay. Second of all; can you review once again the equity levels that you discussed currently and then the equity levels versus the plan debt and equity issuance?

Jim Piro

Yes, I think Jim discussed that in his remarks but I think we are at about 52.6%.

Jim Lobdell

Yes, right now, we repaid the $50 million of maturing first mortgage bonds and that brings us to 52.6, as Jim pointed out.

Maury May - Wellington Shields

Okay and that's at the end of March or now?

Jim Lobdell

That is April 1st. That's pretty much where we are right now.

Maury May - Wellington Shields

And then you mentioned a bond offering coming. Can you discus that again?

Jim Lobdell

Yes, the second quarter we are looking at the potential going out anywhere from $50 to $100 million of first mortgage bonds, just trying to maintain the liquidity of the company; trying to make sure that we are not dipping into any additional short term debt at this particular point in time given now all the activities going to be going on with Port Westward 2. So just kind of positioning ourselves in that perspective.

Maury May - Wellington Shields

And then the big question; the equity question. Are you still looking at 2014 for cast and equity issuance?

Jim Lobdell

We don't know what we are going to be doing at this particular point in time because we don't know what the outcome will be of the renewable and energy RFPs are. They are power purchase agreements. We will take a very close look at it to see what the impact of our power purchase agreements are on the capital structure of the company. If it turns out there are ownership opportunities, then obviously we'll be looking very closely at the debt and equity markets.

Maury May - Wellington Shields

Okay and final question really has to do with those RFPs, the base load and the renewable. A couple of months ago you were saying that you thought it would be late June and early July that you would get the results of both of them and I noticed in the slide deck also you're talking mid-year. So are you really still talking late June, early July for both of those RFPs?

Jim Lobdell

Yes, we're still looking at it in the second quarter. I think that's our plan right now. Negotiations are going well and we should be able to announce the winning bidders in that timeframe.

Maury May - Wellington Shields

So it will be probably in June, probably in late June for both of them.

Jim Lobdell

In the second quarter.

Operator

(Operator instructions). And we'll now go to Paul Risdon with KeyBanc. Please go ahead.

Paul Risdon - KeyBanc

Can you just give order of magnitude of megawatt hour annual basis delta between the new wind normal, versus the old wind normal, or capacity factor?

Jim Piro

I still need to look into the rate case, but in the rate case what we did is we looked at as a five year rolling average and that's what we've done with our thermal plants in terms of availability factor and for its value. So in the rate case we did project based on a five rolling average what the win would be. We've tried to use that for the forecast, compared to what the original design was which was a certain number. Jim do you have the exact numbers on what that would look like in terms of difference in megawatts?

Jim Lobdell

No I don’t, I was just thinking, another way to look at it is a wind form is 450 megawatts. These are approximate numbers, around 30%, a little bit north of that originally in our first profile and now we're down to approximately 25%, as far as the capacity factor expectation for the wind farm.

Jim Piro

We can get you the exact number. Bill can get that for you, because in the rate case we did show the five year rolling average for wind generation based on actual results and that's what we're using for our forecast going forward, and then we'll just strew that up over time, similar to what we've done with Hydro to determine normal.

Prior to that we were using a kind of theoretical number that was based on studies for that site. Now those studies may still be valid but because of just the timing issue, we're going to a five year rolling average and so Bill can get you those numbers offline but they're in the rate case. So they can be discussed.

Paul Risdon - KeyBanc

And then on the RFP, assuming it's with PPA, did I hear you just in response with Maury's question suggest that maybe the impeded debt would drive an equity lease.

Jim Piro

Something we're really concerned about, just given the new accounting standards and how purchase power agreement would show up on the balance sheet and affect our ratio. So generally S&P takes a view that purchase power creates a debt like obligation to a company and therefore they do an impeded debt to look at our overall ratios, and that's a concern to us, and with the new accounting standards potentially coming forward, we might actually have to put the obligation on the balance sheet, which we then have to balance.

So we believe that if we entered into purchase power agreement, we might have to increase our equity ratio to offset that obligation, and we're looking at it pretty closely. Our goal is to maintain investment grade credit ratings and anything that would put downward pressure on that would be a concern in terms of raising our cost and raising the cost to customers. So we are factoring that in and we'll have to make some decisions around that, based on the obligation and the nature of the negotiations and the contractual arrangement.

Paul Risdon - KeyBanc

So you mean you would do an equity raise either way, either outcome.

Jim Piro

We're not going to say when we might add it, but we will clearly evaluate it and include it in our decision making and look at that, if it were a purchase power agreement, what that obligation would look like.

Paul Risdon - KeyBanc

And are both the energy and renewable, could those go either way PPA or cellphone.

Jim Piro

At this point we'd say either way it could go and we're not tipping our hand if you will, which way it will go.

Paul Risdon - KeyBanc

So there's four potential outcomes, two PPAs, two cellphone and then flip one of each.

Jim Lobdell

Yes, it could be any combination of those potentially.

Operator

And the next question is from David Paz with Wolfe Research.

David Paz - Wolfe Research

Just a few follow up questions. In your rate case I think you mentioned you'll be filing updates, I think it was the context of sales forecasts, will you also be updating any impact on bonus depreciation in 2013.

Jim Lobdell

We made a projection in the rate case for tax depreciation. As I recall we have not exercised bonus depreciation just because we don't have the capacity to utilize it. So we continue to evaluate that going forward to see if it still makes sense do or do not do it. So we would likely not update it but if there was a decision to do something, it was definitely the rate case, it would probably come through the discovery process but right now I think our plan is not to move forward and exercise bonus depreciation, just because we don’t have the tax capacity.

David Paz - Wolfe Research

And so the last time you exercised bonus D&A was in 2011?

Jim Lobdell

Yes that was about right. We did 50% in 2013. Yes it was 2010.

Jim Piro

And the reason for that as we were generating so many production tax credits is that we don’t have the tax capacity to utilize the bonus depreciation. So I guess going to be normal tax.

David Paz - Wolfe Research

Also I noticed that you updated your ongoing CapEx, I think you raised ’13 projection then slightly and then slightly lower ’14 and ’17. Just curious are those changes just due to timing or changes and assumed escalation rates, what are driving those slight tweaks?

Jim Piro

Mostly just regulatory updates that’s going on, but I will get back to you.

David Paz - Wolfe Research

No problem and then just on what do you discussed earlier on the higher equity layer or potential higher equity layer under PPA scenario for the base load and renewable RFPs. Would you request a higher authorized equity layer? Would you need to speak approval from OPUC and could that be done in the current rate case?

Jim Piro

So the way you would do it is, the regulators typically want to see real equity on the balance sheet as opposed to theoretical cap structure. If we were to enter into a purchase power agreement, we would have to look at the effective add on the balance sheet and how it will work and if we believe that there was a requirement for extra equity to offset that obligation, we'd have to have a plan to issue it and then we would reflect that in a future rate case.

That probably it wouldn’t hit us in the 2014 rate case because likely the purchase power agreement, if they were to go that way wouldn’t be hitting our balance sheet probably to later beyond that period. So it might be subject to 2015 rate case potentially but it would be something that we have demonstrate the prudency of why we would need that, especially as it would impact our bond ratings and our cost of capital.

David Paz - Wolfe Research

So in interim you would still target 50/50?

Jim Lobdell

Well at this point we are targeting 50/50 at least for the 2014 rate case. 2015 is whole different game depending on what the outcome of the RFP’s would be.

Operator

(Operator Instructions). And we will now take a question from Lauren Duke with Deutsche Bank. Please go ahead.

Lauren Duke - Deutsche Bank

Follow up on the equity ratio comments. Given that you’re already over equitized right now and if you didn’t win more RFPs you might continue down that path, is it possible that you could ask for an equity ratio increase without actually having to issue market equity?

Jim Lobdell

That's a possibility. I don’t know if you’d be able to build your equity balance enough to offset a purchase power obligation, but again it depends on the nature of the PPA obligation and contractual arrangement and then in discussion with the rating agencies, how they would view that, as well as the accounting treatment on our balance sheet.

So there's a whole bunch of things that get factored in there. I doubt if you could build it over time just by retaining earnings. That would obviously factor into the analysis that as you grew your equity and really didn’t have any need to issue debt.

Operator

And we’ll now go to Andy Levi with Avon Capital.

Andy Levi - Avon Capital

Just of couple of things I guess to clear up. So, just back on the equity and the PPA, so if it ended up being PPAs, the equity wouldn’t, assuming you would have to issue equity, that wouldn’t be issued until the PPAs came online, is that kind of the way to think about it?

Jim Lobdell

Well, I think you have to look at the obligation, if when you are entering into the obligation and when the writ agencies would include that. So it usually starts when they start delivering if you will and you have the obligation to pay.

Andy Levi - Avon Capital

Okay. So, I guess the goal would be kind of get that equity ratio higher in conjunction with an equity raise/PPA. Is that kind of the way to look at it?

Jim Lobdell

That’s correct. Again, we will work closely with the rating agencies so that we'd help them understand what that effect is on our ratios and ensure that we maintain credit worthiness.

Jim Piro

I’m trying to recall correctly, as you look at PPA, you’re not looking at the full value of PPA but you’re looking at a subset of that.

Andy Levi - Avon Capital

Right, now I just want to clear that up. That’s obviously important detail. The second thing is what's always happy to hear was that, as your rate base grows and in particular I guess if the renewable/base loads ends up being a building purchase type thing or someone else builds your purchase, that regulatory lag comes down over time. So, I think that’s probably fairly significant and I guess something new to investors. Because I don’t remember you guys talking about that?

Jim Lobdell

No, I think it’s just that basic math of the equation. You have certain dollars that you don’t necessarily get recovery on and those dollars just become a smaller percentage as your rate base grows. So I think that’s just math and if you look at other utilities that have much larger rate base, they probably have about the same amount of dollar dis-allowances but with a larger rate base it's just a smaller percentage for them.

So if you look at our rate base for customer we tend to be at the lower end of the range for utilities and that’s because we are basically short on generation. As we add more generation, get ourselves more in line with where others are in terms of reserve margins et cetera, then that unrecovered cost becomes a smaller percentage.

Andy Levi - Avon Capital

I think that’s significant because I think most sales side analysts really just take your rate base and assume 100 basis point lag, probably an estimate.

Jim Lobdell

Better look at the dollar amount and watch that change overtime as rate base can grow.

Jim Piro

I think that’s all the questions we have and we appreciate your interest in Portland General Electric and invite you to joining us when we report our second quarter 2013 results in August. Thanks a lot and have a great day.

Operator

And thank you very much. That does conclude our conference for today. I’d like to thank everyone for your participation and you may now disconnect.

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Portland General Elect (POR): Q1 EPS of $0.65 beats by $0.01. Revenue of $473M (-1% Y/Y) misses by $63.92M. (PR)