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Executives

Bill Valach - Director of IR

Jim Piro - President & CEO

Maria Pope - SVP of Finance, CFO & Treasurer

Analysts

Brian Russo - Ladenburg Thalmann

Gavin Tam - Macquarie Research

James Bellessa - DA Davidson & Co.

Chris Ellinghaus - Wellington Shields & Co.

Egor Grenandan - Semi Lucas Partners

Portland General Electric Company (POR) Q2 2010 Earnings Conference Call August 5, 2010 11:00 AM ET

Operator

Good morning everyone and welcome to Portland General Electric Company second quarter 2010 earnings results conference call. Today is Thursday, August 5th, 2010. This call is being recorded and as such all lines has 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 Sara and good morning everyone. I am pleased that you are able to join us today. Before we begin our discussion this morning I'd like to make our customary statements regarding Portland General Electric's written and oral and disclosures in commentary. There will be statements in this call that are not based on the 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 10-Q's.

The Form 10-Q for the second quarter of 2010 was available this morning 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 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 call by providing an overview of the quarter's results and our strategic capital projects. Then Maria will provide more detail around the quarter's results and key regulatory proceedings. Following those prepared remarks we will open the lines up for your questions.

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

Jim Piro

Thank you, Bill. Good morning everyone and thank you for joining us. Welcome to Portland General Electric's second quarter 2010 earnings call. PGE's net income for second quarter 2010 was $24 million or $0.32 per diluted share compared to $24 million or $0.31 per diluted share for the second quarter of 2009.

We are increasing our full year 2010 earnings guidance by $0.10 to $1.40 to $1.55 per share up from the prior guidance of $1.30 to $1.45 per share. Increased guidance reflects the positive impact of improved hydro conditions, strong thermal operations and Senate Bill 408. The guidance also reflects the margin impact from a down revision to the 2010 load forecast. Maria will talk more about guidance later in the call.

Now an update on our 2011 general rate case filing. I am very pleased with the productive and open dialogue we've experienced during this regulatory process. We are making good progress and have reached agreement on all revenue requirement items resulting in an overall increase of approximately $52 million in annual revenue. This will cover inflationary cost increases, the effects of reduced loads, new rate based investments and provide the company with the opportunity to earn a fair return on equity.

Excluding future updates to net variable power cost an update to the 2011 load forecast. This represents an approximate 3% overall increase in customer prices, subject to OPUC approval.

We've also reached agreement with the parties in the case on several policy issues. We made progress on the power cost adjustment mechanism resulting in a fixed deadband range of $15 million below to $30 million above base line net variable power cost which will not expand as rate base grows.

We also agreed on the cost of capital with the capital structure of 50% tax and 50% equity, our return on equity of 10% and an overall cost of capital of approximately 8%. We extended our decoupling mechanism for another three years and as the operating life of the Boardman Plant continues to be evaluated, we agreed on a mechanism that will allow recovery of PGE's remaining investment in the plant, if the decision is made on an early closure.

All of these agreements remain subject to OPUC approval which we expect to occur in December of this year. Maria will go into more details on the case later.

Now move on to quarterly results with an economic outlook in our operating area. During the second quarter we saw strong plan operations specifically at our thermal plant. Scheduled maintenance outages were successfully completed and we are exceeding our performance objective.

In the Pacific Northwest, June's record setting levels of rain resulted in an improvement to hydro conditions for the second quarter of 2010, compared to the first quarter of 2010. However when we look at the entire year, energy from hydro resources is expected to continue to be below normal for 2010. While we experience customer growth of a half a percent quarter-over-quarter, overall retail energy deliveries were flat.

Cooler temperatures increased residential energy deliveries; however the continued effects of the weak economy resulted in a decrease in energy deliveries to industrial and commercial customers.

Oregon's unemployment rate has eased to 10.5% in June from its peak of 11.6% in mid 2009. Year-to-date Oregon has added jobs at a rate of half of the percent similar to the overall US economy. In light of continued economic pressures in the region we have revaluated our load forecast for 2010 we project that weather adjusted retail energy deliveries will decrease approximately 1% to 1.5% relative to 2009, our revision from last quarter's load forecast which was approximately flat. The key factors behind this change are slightly lower than expected deliveries to industrial and commercial customers.

On prior calls we have discussed our expectations that energy deliveries to paper product manufactures in 2010 would be lower than 2009 and we continue to be affected by the impact, the weakened economy is having on these commodity based customers.

In addition ramp up from several of our technology customers have been positive but slower than expected. I am encouraged to see that the growth of our solar-cell manufacturing continues and recently Solexant announced they will build a new manufacturing plant in those operating area.

Now an update on our strategic initiatives. Our overall customers satisfactory were very strong in the second quarter. We rank in the top decile for both residential and general business customers. We also rank in the top 10% for residential customers in the J.D. Power and Associates 2010 study.

Power quality and reliability directly contributes to customer satisfaction and during the second quarter our system operated well, our distribution metrics remained strong and our generating facilities ran extremely well.

I am proud that our Selective Water Withdrawal system is operating as expected. Already more than 100,000 migrating fish have successfully passed through the facility. In June, the Selective Water Withdrawal project was honored with the 2010 Edison Award, EEI's most prestigious award which recognizes leadership and innovation within the industry. These accomplishments are outstanding examples of the great work that my coworkers do everyday to deliver value to our customers than our shareholders.

Now an update on our key projects. At the end of July our smart meter project had approximately 800,000 new meters installed throughout our operating area. A total of approximately of 850,000 new meters are expected to be installed by the end of 2010. The budget for the project was increased by $10 million to reflect additional communication enhancements and software development related to business process automation.

We recently announced the good news that the first turbines at Phase 3 of Biglow Canyon Wind Farm are generating electricity. 24 turbines are currently on line with all 76 turbines expected to be completed by the end of the third quarter of 2010. Phase 3 has an estimated total cost of $390 million including $20 million of AFDC with installed name plate capacities of 175 megawatt.

All three Phases of Biglow Canyon when completed, we expect to meet approximately 11% of our load with renewable energy in 2011. This is ahead of Oregon's renewable energy standard first benchmark of 5% by 2011. The next benchmark is 15% by 2015 with a final target set at 25% by 2025.

Our strategy for meeting at 2015 renewable energy benchmark is one part of our 2009 integrated resource plan. The evaluation of the economics associated with putting new emission controls on the Boardman Plant is another part of that plan.

In April, we submitted a petition to the Department of Environmental Quality requesting a revision to the existing regional haze rules for Boardman. This [Bar-2] petition called for the installation of certain limited emission controls and then seeking coal-fired operations by the end of 2020.

In June the Oregon Environmental Quality Commission voted to deny our [Bar-2] petition and directed the DEQ to propose alternatives through a new rule making. The DEQ proposed three new options for Boardman that it believes would meet federal regional haze requirements.

The three new options required different combination of emission controls and would require us to cease coal-fired operations needed 2015, 2018 or 2020. These new options are in addition to the current rule that allows PGE to install all controls and operate the plant to 2040 or at the end of life.

Details of each of these options are clearly outlined in our Form 10-Q. We believe that these new DEQ options would impose greater cost, price volatility and reliability risks on our customers and in some cases they are not technically feasible. We continue to aggregate for a 2020 timeframe with a reasonable level of emission controls as the best path to meet applicable environmental standards at a reasonable cost to our customers while maintaining reliable electric service.

We already have a path resolve all current emission requirements with the existing regional haze rule for Boardman and continued operation for at least the next 30 years. However, it would be unfortunate to lose the opportunity to achieve an even better outcome for our customers and the environment. We are urging the DEQ to work with us to develop a reasonable 2020 framework within appropriate emissions control strategy.

We will continue to advocate for our balanced solution for customers in the environment that allows sufficient time to put replacement generation resources in place. As expected the DEQ will submit a new proposal in mid August with the final rule by the Oregon environmental quality commission anticipated at the end of 2010.

Our Integrated Resource Plan was filed the OPUC in November of 2009, the proposed 2015 IRP action plan includes meeting approximately 15% of our load growth over the next decade through energy efficiency measures as well as with the addition of the following generation and transmission projects.

In addition 122 average megawatt with new renewable resources to meet Oregon's renewable energy standard requirement of 15% by 2015, our natural gas facility to meet additional base load requirements estimated at 300 megawatts to 500 megawatts, our natural facility for additional peak load requirements estimated up to 200 megawatts and a new transmission project called Cascade Crossing.

Recently we signed a Memorandum of Understanding with PacifiCorp to officially open discussions on establishing an agreement to jointly develop, construct and only propose Cascade Crossing transmission project in Oregon. There is a regional need for more transmission and we have received a lot of interest in this project.

This MoU is a positive step in the process. Upon receipt of the commission acknowledgement of our IRP we plan to conduct three separate RFP bidding processes; the first for new renewable resources, the second for baseload generation and the third for peaking generation.

In each of the RFPs we plan to include our own self-build options to compete with the market bids. We expect the RFPs to be completed by the end of 2011 or early 2012. In April we filed an addendum to the IRP which recommended ceasing coal-fired operations at the Boardman Plant by 2020. In April we filed an addendum to the IRP which recommended ceasing coal-fired operations at the Boardman plant by 2020. In July the OPUC revised the timeline for reviewing the IRP to be more in line with the Oregon Environmental Quality Commission schedule. We expect the final OPUC decision on the IRP by year end 2010.

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

Maria Pope

Good morning. Bill covered the increase in our 2010 earnings guidance, the quarter's financial results, as well as update on our general rate case and conclude with a discussion on financing and liquidity.

As Jim, discussed we are increasing our 2010 earnings guidance by $0.10 to $1.40 to $1.55 per diluted share. The guidance change reflects four key drivers. First, hydro conditions have improved as a result of the worst June on record in the Pacific Northwest. We specifically have seen material improvements on the Clackamas River and the Deschutes Rivers.

Second, PGE's plans are operating well. This is primarily due to favorable market prices of both power and gas as well as plant availability. We should provide an additional opportunity to economically dispatch our thermal operation. Offsetting these positive factors, we continue to experience a negative effect of the recession. We have reduced our 2010 weather adjusted load forecast from approximately flat to down 1% to 1.5%.

And finally the last factor is the positive impact of Senate Bill 408. Hydro condition, Thermal plant operations and SB 408 each represents approximately $0.05 in EPS, with the decline in retail margin representing a negative $0.5, for the combined guidance of $0.10 per share for the year.

Now on to second quarter results. Second quarter 2010 net income was $24 million or $0.32 per diluted share. This compares to $24 million or $0.31 per diluted share for the second quarter of 2009.

Similar to full year expectations operating results for the quarter were positively impacted by coolers in normal temperatures, strong power supply operation and impacts of SB 408, all of which were partially offset by the continued effect of a weak economy.

Retail revenues increase 7% in the second quarter of 2010 compared to the second quarter of 2009. A majority of this increase is related to the returns of the former direct access industrial customer to PGE for its energy supply. Additionally, in the second quarter we continue to see customer growth of approximately 4,000 retail customers.

Total retail energy deliveries were flat quarter-over-quarter. Residential energy sales increased 2.4% due to colder than normal weather in the second quarter of 2010 compared to warmer than normal than normal weather in the second quarter of 2009.

On a weather adjusted basis, total retail energy deliveries decreased 3.5% quarter-over-quarter due to the sustained effects of a weak economy. This is the similar trend to what we saw in the first quarter where total retail energy deliveries decreased 3.3%. In the second quarter we continue to see energy deliveries to industrial and commercial customers, decreased combined 1.1%. While still down this is better than first quarter trends of negative 5% quarter-over-quarter.

In the second quarter overall customer prices decreased approximately 4%, reflecting a decrease in net variable power cost, partially offset by increases for Biglow Canyon Phase II and Selective Water Withdrawal project, which are now in customer prices.

Average variable power cost decreased 7% in the second quarter 2010 compared to the second quarter 2009, primarily due to an increase in low cost generation resources, fuel expense increased in 2010 due to the increased thermal plant availability coupled with the utilization of PGE-owned generating resources to meet load. Year-to-date June 30 total companies thermal plant availability was at 89%. For PGE operated plants availability was at 92% versus 84% in the first half of 2009.

Now, more on hydro. Regional hydro conditions improved significantly over the first quarter expectation due to record level specification in June. Energy received from hydro resources during the second quarter 2010 was slightly above normal levels versus the 21% below normal we experienced in the first quarter of the year. During timing, hydro conditions still negatively impacted our financial performance by approximately 1.2 million pre-tax in the second quarter of, compared to a positive impact of approximately 1.4 million pretax in the second quarter of 2009. Overall for 2010 we continue to forecast hydro conditions to be below normal.

On the wind side, we continue to see an increase in generation. Wind production provided 6% of PGE's retail load requirements in the second quarter of 2010, compared to 3% in the second quarter of 2009. Primarily as a result of Biglow Canyon Phase 2 become operational mid last year.

Now I will update you on a few regulatory item starting with our power cost adjustment mechanism or PCAM. For 2010 the PCAM has deadband ranges of approximately 70 million below to 35 million above the net variable product base of line. Year-to-date through June 30 the net variable power cost were approximately $9 million below the base line. Net and variable power cost for this year are expected to be below the base line within the established threshold. Accordingly no amount was recorded for a refund to customers as of June 30.

For decoupling we recorded a collection from customers of $3 million in the second quarter of 2010. This resulted from lower weather adjusted use for residential and small commercial customers and what was accrued in the 2009, general rate case.

Now we'll move on to the 2011 rate case. We have reached the stipulation on all revenue requirement item, resulting in an increase of approximately $52 million in annual revenue; a 10% ROE and a 50-50 cap structure. The increase includes a reduction in net variable power cost of $48 million. These power cost in our 2011 lowest forecast will be updated later in the year before prices are set for 2011.

Revenue increases recovered inflationary cost and other cost increases now offset by saving the smart meter and our continuous focus to reduce expenses and gain long-term efficiency. We also agreed to remove several capital projects estimated at approximately $95 million which are expected to placed in service mid year and add to the average 2011 rate base on $3.1 billion.

Parties supported the use of differed accounting when these capital projects are placed in service. Additionally, we adjusted depreciation expense and other items not affected earnings. Jim mentioned that we have reached the agreement on several key policy objectives, most notably the power cost adjustment mechanism. The deadband for our current PCAM grow with addition to rate base in our A symmetrical.

Under the current structure the deadband for 2011 would have been $40 million above and $20 million below the base line. A modification of the PCAM alters the mechanism to being fixed now advance of $30 million and $55 million in 2011.

Going forward, rest of the PCAM structure remains unchanged with an earnings test of 1% above and below our allowed ROE is 10% and the 90/10 sharing outside the deadband. While we did not receive approval on all of the adjustment mechanisms requested, parties have reached agreement on recovery for cost associated to define benefit pension plan, a provision for cost recovery of future storm damage and automatic adjustment clause related to recovery of our remaining investments in Boardman in continuation of the cover for residential and small commercial usage and our last revenue mechanism for longest non-residential customers.

The 2011 rate case as provided by these stipulations is subject to OPUC approval. We are currently in the process of aligning our 2011 projects with the revived estimates and assumptions. As Jim mentioned we have increased the constructive process of working together with OPUC staff and customer group and the final order is expected by mid-December with new prices becoming effective, January 1, 2011.

Now I would like to discuss Senate Bill 408 a complex tax law. As we discussed last quarter, when differences exist between taxes paid and taxes collected in customer pricing, a surcharge or refund to customers is acquired. A key element in SB 408 is the protection of federal tax normalization rules.

As a result, in 2010, these are significant accelerated tax depreciation. The protection of normalization rule will come in to effect which impacts the calculation. For second quarter of 2010, PGE recorded an estimated collection from customers of $4 million compared to an estimated refund of $9 million in the second quarter 2009.

Now on to financing and liquidity. We are active in the wholesale marketplace entering into forward contracts for natural gas and products to mitigate price risks for our customers. As of June 30, we posted approximately $270 million in collateral with wholesale counter plays, which consisted of $77 million in cash and a $193 million in levels of credit. If market prices remain unchanged and if contracts settle, we would anticipate the 29% or approximately $74 million in letters of credit and $4 million in cash for roll off by year end, and another 46% will roll off in 2011.

We have $600 million in revolving lines of credit, of which $387 million was unused as of June 30. At quarter end, we had no commercial paper outstanding, a direct drop in the revolvers. During the first half of 2010 we issued long term debt of $249 million, which completes our debt issuances for the year.

In the general rate case we forecasted the issuance of $300 million as equity in the latter part of 2011. This issuance is in anticipation of large capital projects in the IRP. I would like to emphasize that the ultimate amount and timing of future equity issuances is dependent on market conditions as well as PGE's earning, cash flow, capital expenditures and project timing. Capital expansions will be affected by the outcome by our IRP process and the result of the RFP competitive bidding process.

We target a capital structure of 50% debt and 50% equity. Periodically, we are higher or lower. As of June 30, our equity ratio was 46.3% our 2009 capital expenditure have been reduced and we are estimated to be above up to $495 million of capital expenditures for the year, of which the company has already completed more than half. The $495 million capital expenditures include $245 million for upgrades to and replacement of generation, transmission and distribution infrastructure. A $175 million to complete Biglow Canyon Phase III, $50 million for smart meter project and $25 million hydro relicensing and coordinate emission control.

Additionally to take advantage of tax carry back opportunities we plan to make an early pension payment of $30 million in the third quarter, offsetting 2011 and part of 2012 contribution.

In closing, we continue to focus our financial objective that supports according to our lead business and growth initiative, including adequate liquidity to maintain our investment grade credit rating and readily available access to capital markets while earning competitive rate of return on our invested capital. Jim?

Jim Piro

Thank you, Maria. Our second quarter result show we are making solid progress on several key projects. Customer satisfaction continues to be high. Construction at Phase III of our Biglow Canyon Wind Farm is on time and under budget and we continue to work constructively through the regulatory process on our 2011 general rate case and the 2009 integrated recourse plan including Boardman. Looking ahead, we will continue to position the company for future growth opportunities that deliver value to our shareholders and our customers. Operator, we now like to open the call for question.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brian Russo with Ladenburg Thalmann.

Brian Russo - Ladenburg Thalmann

You mentioned earlier kind of the timing of the equity issuance and it's kind of towards the latter end of 2011 and the contingent on the IRP approval. But I thought you mentioned earlier in your comments that the three individual RFP process, you hope to complete by year end 2011 or early 2012. Is the equity offering contingent on completion of that or are there other factors as well, like trends you see in your equity ratio from now until then?

Jim Piro

Its a combination of both Brian but really its be driven by the RFP and whether we are successful on those projects, and I think that's really the key point here is that if we are successful with the RFP then we wouldn't need to issue equity and the timing of that would be towards the end of '11 or into 2012. It appears from the process that we have lost some slippage in terms of the IRP process and the IRP is going to take some time. So, things tend to be slipping a little bit but again it will be depending on RFPs primarily.

Brian Russo - Landenburg Thalmann

So we just kind of look for the final RFP outcomes as kind of the signal as to maybe the timing that you might issue equity.

Jim Piro

That said in RFP we have three RFPs going forward and so each of those will play. If just the peakers were successful in then maybe we wouldn't need to issue equity. If we get the peaker there in the base load generation and also the renewable then obviously we will need to issue equity. So a lot of them is depended on the outcome of that RFP process.

Brian Russo - Landenburg Thalmann

And then you mentioned part of the increase in guidance was the result of improved performance of your thermal plant. And I think you also mentioned lower market prices. And I am just curious with the above average run-off in June. Were you able to just not run some of the thermal plans and buy low cost power to sell to your customers, just curious about dynamic works.

Jim Piro

The way it works Brian is, when we see that heavy hydro conditions we are able to shutdown our thermals and take advantage of lower market prices. We also saw lot of wind during the second quarter and that again allowed us to back up on thermals. Our wind generation was significantly higher than the first quarter. And the combination of good hydro and favorable wind conditions really allowed us to back up our thermal plants and leave them as a back stop for our system. We are able to sell the gas or not bring the coal and keep that in inventory. So that was clearly a factor that helped the second quarter, that flexibility that we have in our system that allows us to take advantage of good market conditions.

Brian Russo - Landenburg Thalmann

Lastly you mentioned some of these new technology related customers that you are optimistic will start up soon. Is that captured in this 2011 test year rate case sales assumption or will that kind of be incremental to what you guys settle down, yesterday?

Jim Piro

The way the load forecast were accessed we try to continue to update it through the process. We will do another update based on the September data from the state, so we will continue to watch the economic conditions in Oregon. We do have the opportunity as part of the regulatory process in this general rate case to update the load forecast as well as net variable power cost later in the year. So we will continue to monitor those customers to see how their plans are advancing as well as the pace of their growth. In many cases, we have the solar company, SolarWorld and Sanyo and then Genentech they are ramping up but not ramping up as fast as we had expected. We will try to get the best information when we update our load forecast to make sure that our prices are in line with the expected loads for 2011. And so we get that opportunity in the September timeframe.

Operator

Your next question comes from the line of (inaudible).

Unidentified Analyst

There was an article that Oregon in July about a sudden surplus wind power coming out of the cores in May. Two parts of the question, one I am assuming the BPA could force you to shut down Biglow Canyon. I just want to ask if that's true and b) I am wondering where the power will come from. To what extent you will be able to self generate or would you need to buy power and as also discussed back to the PCAM its great but the deadband is fixed but still quite wide. And I am just wondering how you think about forecasting supply and power cost as a reliance on wind power grows over time?

Jim Piro

Great question Jennifer, I think it is one of the big challenges in the region as we continue to add more wind resources in the region. I think we are close to about 3,000 megawatts total in the Pacific Northwest. And then obviously raising some challenges to Bonneville to try and then operate as system with such a variable resource. And it's something we are all working on in the region looking for ways of storing wind through your pump storage or compressed air or looking to add in peakers to manage the flexibility in the variability of wind.

What happened in June, as we did have a tremendous amount of hydro and Bonneville does have operational control to back off wind if there is not sufficient load, but they have constraints on the hydro system. They have certain fish constraints that they need to meet on the hydro system and maintain certain flows and the motivator run that water through the generators as opposed to spilling which causes dissolved gas problem.

And so they can back off on wind that tends to be kind of intermittent and the extent they back off wind that usually assigns that there is a lot of hydro in the region, I mean prices are getting bid down, pretty low in the marketplace and so what we all do in those cases if they were to curtail us, we would then be able to buy secondary power in the marketplace. So usually when that occurs, we are in a situation in the spring. We have lots of hydro and potentially lots of wind and so market prices are pretty favorable at that point. Sometimes crisis can actually go negative because of the need for wind generators try to generate the capture production tax credit.

So, yes it has some effect but not a material effect on the company. It usually happens in the night time when we have minimum load problems. As I mentioned earlier, we tend to try to shutdown our thermals and we see that coming and try to keep enough wind and hydro in the system so that we don't have to back down the wind.

And so your second question, we are very pretty pleased with the progress we made on the peak. We would obviously like to have symmetrical deadbands. We like to have a little tighter in. But this is the process we need to continue to work through. Many of our hydro contracts are starting to go away so our exposure to hydro is diminishing but in the same sense our exposure to wind is growing a little bit. And we will continue to work with our customer groups and the regulatory staff and the commission, to talk about how we deal with that variability going forward?

We are comfortable with the progress we made but this is just a step in our longer process and as we get more exposure to wind we are going to have to work with the regulators on kind of what is the average wind generation look like as well as what is that which hydro look like, so we will continue to work in this project and it's a longer term plan that we are pleased with the progress we made today.

Operator

Your next question comes from the line Gavin Tam with Macquarie.

Gavin Tam - Macquarie Research

Question on electric output data. So the Pacific Northwest seems to be pretty weak. Wondering your sales outlook, does it increase July? And then could you go over your customer exposures. What do you expect for commercial industry in the second half? And then what portion of that 4% commercial decline is covered by your decoupling mechanism? Thanks.

Jim Piro

Let me take the take a high-level then I'll let Maria get into more of the detailed numbers. We have seen weakness in the economy. We look at our industrial customers in the group but half are up and half are down relative to their forecast and in many cases its just the slower pace of growth that we had anticipated, others have just kind of trim back as we are highly dependent on manufacturing and they turn back a little bit of their production. Kind of on the bright side, Intel continues to operate and be strong as customer of ours, Nike has done well. Genentech and the solar companies continue to grow but I'll be at a slower pace so those are all been positive science.

And as we mentioned, the commodity businesses have struggled a little bit primarily in the paper and steel side. On the commercial side, the weakness is then, it is just a secondary impact of a slow economy where the population isn't going out and buying as they previously had and when we seen recovery and so it has been slow.

We do have as I mentioned early the opportunity to update our load forecast to reflect those changes that will hopefully put us in a good position to allow us to recover our cost in 2011 and we will continue to watching that. There is a report out from Kim Dui University of Oregon. It seems indicative softness in the Oregon economy but our state economist Tom Potiowsky still believes that we will see slow growth in 2011 albeit we've taken a little bit of pause here. Marie, do you want to go into kind of numbers and the decoupling issue.

Maria Pope

Just for a perspective if we look back on the first quarter of the year, we were down in all segments residential, commercial and industrial. And industrial was down quite significantly at about 6%. Industrial in the second quarter was almost flat where it was second quarter last year.

Residential continues to decline and then also commercial was slightly worse. So with that improvement in industrial that we were pleased with in the second quarter. On average, quarter-on-quarter, each of the quarters was similar in terms of where they were versus last year. If you remember last year it was sort of the June, July time period where our industrial and then laid a commercial customers began to take a much more significant down turn in their low.

And residential actually held up all the way until the first quarter of this year. For the latter half of the year, we are forecasting residential to be roughly flat with last year. Commercial will be roughly flat and then industrial to have a slight improvement for combined and on the full year of 1% to 1.5%. Not all of this will affect our bottom-line. We do have the decoupling mechanism which covers all of our residential and this are small commercial for back 60% of our customer base in total.

Jim Piro

But not all the commercial is covered by, just a very small portion, so very small piece of the commercial reduction is covered in de-coupling.

Operator

Your next question comes from the line of James Bellessa with Davidson & Co.

James Bellessa - DA Davidson & Co.

Cascade Crossing transmission line, can you give us some highlights of what that might look like? How many miles? What kind of pullable which you might install? What might be the cost? What's your partnership splitting might be or how much do you think you can handle yourself?

Jim Piro

We have decided to go forward with, at least at this point in the planning phase, the double circuit line which could have a capacity of up to 2,500 to 2,700 megawatts. We've decided that that's a good move because of the need for transregional transmission. Our PacifiCorp has indicated an inertest for about 600 megawatts of that capacity and we're in the conversation wit them. I'm trying to reach a definitive agreement on a partnership where they could own that share of the project. We are also in conversation with the other potential partners that we can't disclose at this point but hope to find some additional partners. Besides that we've had a number of interconnection requests from generators who would like to interconnect in the system, which again is a positive sign for us, in terms of the project (inaudible) it roll over 200 miles, double circuit line a major portion through an existing right away; I think we are on $825 million assuming all phases of the project are completed. So those are preliminary. The construction timeframe is in the 2013 to 2016 timeframe but as you can imagine we have to get through all the permitting and licensing phase of that which we are working on right now. It is important to get a partner on this project and we are pleased that PacifiCorp has entered into the MoU for those conversations. As you know they have a load in Southern Oregon that they need to serve and this would allow them to move power into that service territory. So we are making good progress on the project. We got long ways to go to get to the finish line. We have not yet got full approval to move forward on the project. We are still in the licensing phase and until we get licenses secured and from net gain and final ratings for the project it's still in the planning stage.

James Bellessa - DA Davidson & Co.

What does this takes receiving incentive compensation for transmission?

Jim Piro

A lot of that will depend on how the ultimate structure of the line is. If it's a first-regulated line it would go under first jurisdiction. Typically our transmission has been used to serve retail load only and so then it gets regulated as a retail rate based investment in our Oregon rate base. So depending on the final structure of the line and how its ultimately developed, and later be under FERC Regulation which at this point gets the premium return on equity or it could be under Oregon jurisdiction if its just fully used for Oregon customers and that's something we continue to look at as we move forward to determine what is the appropriate place to regulate that line and a lot will depend on the structure that we end up with and that's still in the preliminary conversations. But I think for Europe you should just assume a regulated rate based item in Oregon.

James Bellessa - DA Davidson & Co.

And Eastern (inaudible) so this is in your Boardman Plant?

Jim Piro

Actually it starts the Coyote Springs which is Northeast of Boardman a few miles like 40-50 miles I think, maybe like the 20 miles. It will pick up the Coyote Springs. It might interconnect with the Idaho line that comes from Idaho and then it will go through Maupin and then into the Salem area which is a southern part of our system. So, that's the route that we are looking at and that's the preferred route. What's the good think about this is, we will create some diversity of transmission. Right now all the transmission tends to go up the gorge. So it's going east to west and so this will clearly provide some diversity and some reliability value to our system which as we add more and more wind recourses is critical for the region.

James Bellessa - DA Davidson & Co.

You've been considering I think in your Boardman from gas-fired facilities is tying into those.

Jim Piro

Yes, we have a project called Carty which we are planning for as a potential self-build option in the RFP. Carty would be reciting the two unit gas-fired base load generation units. The first unit would be bid into the RFP as part of the self-build option; the second unit at this point of back stop for Boardman contingency if in case we have to close Boardman down earlier, we are looking at two routes. For Carty we are looking at both Bonneville transmission as well as Cascade Crossing. So we still haven't made a final decision and until we get our final determination on Cascade, we want to keep our options open for transmission. So, we can either interconnect Carty with Bonneville or we could connect Carty into Cascade Crossing.

Operator

Your next question comes from the line of Chris Ellinghaus with Wellington Shields.

Chris Ellinghaus - Wellington Shields & Co.

Jim just as you're mentioning Carty. Carty 1 is part of the IRP is that correct?

Jim Piro

It would be a self-build option to meet the base load generation in the RFP as part of our IRP. So it will be bid in as a self-build option for base load generation.

Chris Ellinghaus - Wellington Shields & Co.

I just want to clarify Carty 2 is the Boardman replacement option.

Jim Piro

That's a back stop for Boardman and we have yet to determine, if Boardman has a early closure whether we have to go through an RFP or we would just move quickly to use Carty 2 as its replacement resource.

Chris Ellinghaus - Wellington Shields & Co.

Would that be similar scale to Carty 1.

Jim Piro

We sited the 900 megawatt dual unit site, so yes.

Chris Ellinghaus - Wellington Shields & Co.

The whole Boardman issue is very confusing which is here on outside, I can only imagine what it's like for you. Can you give us some more clarity on how you view the situation?

Jim Piro

Well right now, we are waiting for DEQ to issue a proposed final rule. They've given us some proposed rules that we don't find either financially viable for our customers or technically feasible. And so we are hoping to work with the DEQ to come up with a 2020 plan that has caused effective for our customers as only to the environment needs that the DEQ feels like are appropriate for the project.

And we will have to wait to see whether the DEQ proposed rule kind of finds that midpoint. If we cannot find a reasonable the 2020 plan that could meet both the economic and environmental needs of our customers. We will be faced with either and nearly shutdown in 2015 which we think puts significant risks on our customers, moving forward with an acknowledgement for the 2040 plan, which has put all the emission controls in place. And that's where we've been from day one as we think that 2040 plan is the best plan from our customers if we really have those two options, 2015 or 2040. So we are hoping to find this interim closure plan on coal in the 2020 timeframe, that allows us enough time to replace Boardman but still meet the environmental requirement and that's cost effective.

So that's kind of where we are. We'll see in the DEQ proposed rules in mid-August; they may not get published by the Secretary of State in early September but that's an important milestone in the project which will kind of set the stage where we go next with the Boardman facility.

Chris Ellinghaus - Wellington Shields & Co.

Is it starting to feel like 32 is becoming more and more necessary and maybe on a faster timetable than you had originally planned?

Jim Piro

It's hard to do it much faster than what we've got on our drawing boards. I think right now Carty-1 is planned in the 2014 to 2016 timeframe. We need to get that unit built because we are still significantly short to the market assuming it's successful in the RFP and then we would follow on with Carty-2. So we're looking at Carty-2 in the 2018 or 2020 timeframe to get that project completed just given that we haven't got turbines lined up, there's a lot of uncertainty when those projects will exactly come on line because we really haven't got into equipment suppliers and found out what the lead time is for equipment. So, we clearly want to sight that as a two unit site so we have a backup. If we lose Boardman, we will be significantly short to the market, probably in the sense of something like 40% short. And that's the place we're not comfortable as a company and so we really do need to have a back stop to project ourselves and be clear that we can provide electricity to our customers.

Chris Ellinghaus - Wellington Shields & Co.

Sure. Maria, do I recall correctly in the first quarter that SB 408 was neutral to earnings?

Maria Pope

Yes.

Chris Ellinghaus - Wellington Shields & Co.

Okay. Have you got any kind of color on, you said that you expect hydro for the year to still be below normal but how do you see particularly after July where the back end of the year looks?

Maria Pope

Sure. We are looking for obviously a positive impact in Q3 and Q4, that's really quiet unknown. Right now we're just calling it of that normal.

Chris Ellinghaus - Wellington Shields & Co.

Okay. But it's a part of your guidance. Is it pretty significant swing, how your expectation through the third quarter have changed?

Maria Pope

Sure. It would also be the second quarter expectations came in quite different from the first quarter.

Operator

Your next question comes from the line of Egor Grenandan with Semi Lucas Partners.

Egor Grenandan - Semi Lucas Partners

A bit of a follow up on the equity needs. I know that it's a bit early in the year you're waiting on the RFP result from the RFPs but just given the recently signed MoU with PacifiCorp on Cascade Crossing line and I guess you guys are seeing some more interest from other parties, is that potentially how view at your future equity need in '11, '12 timeframe?

Jim Piro

The adjusted (inaudible) wouldn't been built in 2013 to 2016 timeframe so we are long ways from actually having to raise capital to fund that project. Clearly having the partners, which we've always anticipated, we try to get partners in our project. Really having a partner would reduce the capital requirements of the project, and that something we have assumed kind of day one that we would try to find a partner for that project because we didn't think we could take the whole project ourselves. So we really do want to get a partner. But in terms of the 2011, 2012 equity needs kept across right at the back during the bad decision.

Operator

(Operator Instructions)

Jim Piro

Okay, I think that ends the call. So, we appreciate your interest in Portland General Electric and invite you to join us when we report our third quarter results in the third quarter of 2010. If you have any additional questions, please contact Bill Valach who will be available after this call. Again, thanks for joining the call.

Operator

This concludes today's conference call and you may now disconnect.

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Source: Portland General Electric Company Q2 2010 Earnings Call Transcript
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