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Portland General Electric Company (NYSE:POR)

Q1 2011 Earnings Call

May 5, 2011 11:00 AM ET

Executives

Bill Valach – Director, IR

Jim Piro – President and CEO

Maria Pope – SVP, Finance, CFO and Treasurer

Analysts

Eric McCarthy – Praesidis Asset Management

Sarah Akers – Wells Fargo

Stefka Gerova – JP Morgan

Operator

Good morning, everyone, and welcome to Portland General Electric Company’s first quarter 2011 earnings results conference call. Today is Thursday, May 5, 2011. This call is being recorded, and as such, all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) And for opening remarks, I would like to turn the conference over to Portland General Electric’s Director of Investor Relations, Mr. Bill Valach. Please go ahead, Mr. Valach.

Bill Valach

Yes, thank you, Kelsey, and good morning, everyone. We’re 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 disclosures and commentary. There will be statements in 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 10-Qs.

The Form 10-Q for first quarter 2011 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 first 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 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 and thank you for joining us. Welcome to Portland General Electric’s 2011 first quarter earnings call. I’m very proud of our strong operating performance during the first quarter. Through effective power supply management, we were able to economically displace a significant amount of our thermal generation with increased energy received from hydro resources and low cost purchase power.

Our transmission and distribution system performed well, and we continue to focus on cost efficiency and effectiveness, keeping our operating costs in line with our 2011 general rate case. All while remaining – maintaining high levels of customer satisfaction. PGE’s net income for first quarter of 2011 was $69 million or $0.92 per diluted share compared to $27 million or $0.36 per diluted share for first quarter 2010. We are increasing our full-year 2011 earnings guidance by $0.10 to a $1.90 to $2.05 per share from the prior guidance of $1.80 to $1.95 per share.

Increased guidance primarily reflects improved hydro conditions and lower purchase power costs. Now let’s move on to the economic outlook for our operating areas. We continued to experienced customer growth with the addition of 3,800 new customers since the first quarter of 2010. Oregon seasonally adjusted unemployment rate declined in March to 10% for the state and 9.6% for the Portland metro area. This compares to the U.S. average of 8.8% in March.

Oregon’s decline was due to an increase in job creation, particularly with business employers. Total retail energy deliveries on the weather adjusted basis increased approximately 3.1% compared to first quarter of 2010. While we experienced increases in delivery across all customer segments, the load increase was driven primarily by one large industrial customer in the paper sector and deliveries to high tech customers.

We project that weather adjusted retail energy deliveries for 2011 will be approximately 1% above 2010 levels, which is the net of the expected impacts of energy efficiency efforts. Now an update on our strategic initiatives starting with operational excellence. We continue to deliver excellent operating performance companywide. Our system operated extremely well. Our distribution reliability metrics remained strong. And although a considerable amount of thermal generation was economically displaced during much of the first quarter, generating plant availability remained high.

In overall customer satisfaction, we ranked in the top decile for residential and general business customers and in the top quartile for large industrial customers. Recently J.D. Power ranked PGE second in the region and fourth in the nation for overall satisfaction in their 2011 Electric Utility Business Customer Satisfaction Study. I’d also like to mention that Steve Hawke, Senior Vice President of Customer Service, Transmission and Distribution is retiring in July after 38 years with the company.

Steve’s dedication to customers and operational excellence helped the company achieve top industry rankings for system reliability and customer satisfaction. I’d like to thank Steve for all he has done. Bill Nicholson, who has worked closely with Steve for many years, will step into this role. Bill joined PGE in 1980 as a Generation Engineer. He was appointed to the executive team in 2007 to lead customers and economic development and has served as Vice President of Distribution since 2009.

I am confident that Bill has the broad experience and extensive knowledge to take on this important role. Now an update on our future investments. I’ll begin with an update on our Boardman coal-fired plant. In December 2010, the Oregon Environmental Quality Commission approved new rules as part of the state’s implementation plan for Regional Haze for Boardman. The rules require installation of new emission controls and allow continued coal-fired operations of Boardman through 2020.

Under a separate set of rules, PGE is required to install controls to eliminate 90% of mercury emissions. The total cost of all of the emissions controls is estimated at approximately $60 million, excluding AFDC. The Environmental Protection Agency is expected to make a final decision on the state’s implementation plan for Boardman by mid-2011.

In addition, we submitted a regulatory filing with the OPUC in April requesting the recovery of increased depreciation expense reflecting a change in the retirement date of the Boardman plan from 2014 to 2020. If approved, an approximate increase of less than 1% would be included in customer prices as early as July of this year. In a separate federal rule-making process, the EPA is addressing national emission standards for a variety of hazardous air pollutants. Proposed maximum achievable control technology or MACT standards for these emissions were announced in March, with approval scheduled for later this year.

We are currently evaluating the rules and have not yet determined whether we can meet all of the proposed standards with current and planned control technologies. PGE will continue to advocate within the EPA rule-making process to allow for innovative solutions like the Boardman 2020 plan under the MACT standards. Now I’ll move on to our integrated resource plan. Our IRP action plan which was acknowledged by the OPUC last November included meeting approximately 50% of future load growth through energy efficiency measures and meeting the remaining energy and capacity needs through new generation and transmission projects.

To achieve the generation portion of the plan, we will conduct three separate competitive bidding processes to acquire the following resources. First, approximately 200 megawatts of year-around flexible peaking resources. This RFP will also seek additional seasonal peaking resources. Approximately 200 megawatts of winter and summer peaking supply and approximately 150 megawatt of winter only peaking supply. We plan to bring these resources online in the 2013 to 2015 timeframe.

Second, approximately 120 average megawatt of new renewable resources to help meet Oregon’s renewable energy standards. We plan to bring these resources online as needed to meet Oregon’s 2015 RES requirements of 15%. And finally, approximately 300 to 500 megawatts of base load, high efficiency natural gas generation. We plan to bring these resources online in the 2015 timeframe. In each of the three competitive bidding processes, we currently plan to include our own self-build options to compete with the market bids. In April the OPUC approved the selection of the Axion Group to act as the independent evaluator for the RFP processes.

The process for the peaking resources will likely be completed in late 2011 or early 2012. The process for the new renewable resources will likely be completed by late 2012 or early 2013, and the process for the base load resources will likely be completely by mid-2012. The IRP action plan also includes our Cascade Crossing Transmission Projects. We’ve entered into MOUs with Bonneville Power Administration, PacifiCorp, Idaho Power and the Confederated Tribes of Warm Springs

Studies have begun on private and public lands and the results will help determine the final route and facilitate the state, federal and tribal permitting processes. Looking ahead to future capital expenditures, we will complete the RFP process and the results will provide better clarity on our equity and debt requirements. The amount and timing of future financings is dependent on the outcome and timing of the competitive bidding processes, our Cascade permitting process, 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.

Maria Pope

Good morning. Thank you, Jim. Today I’ll cover our financial results for quarter, review operating performance, provide an update on key regulatory items, and conclude with our liquidity and financing. First quarter 2011 net income was $69 million or $0.92 per diluted share, compared to $27 million or $0.36 per diluted share for the first quarter of 2010. Operating results for the quarter were driven primarily by increased retail energy deliveries and decreased power costs.

First quarter 2011 retail revenues increased 10% from the first quarter of 2010. This increase was primarily due to a 10% in retail energy deliveries, resulting from cooler than normal temperatures compared to unseasonably warm temperatures in the first quarter 2010. And secondarily, an increase in demand from our paper and high tech manufacturing customers.

For the first quarter of 2011, weather positively impacted results by approximately $0.05 per share, compared to a negative impact of approximately $0.05 per share in the first quarter of 2010. Also contributing to the increase and retail revenues was a 3% increase in average retail prices and customer growth of 0.5%, quarter-over-quarter.

Decoupling had a de minimis impact in the first quarter of 2011. This compares to a $5 million collection from customers recorded in the first quarter of 2010. Further offsetting revenues, was an aggregate $10 million effect OF regulatory items which were offset in other areas of the income statement. Purchase power and fuel expense decreased 13% quarter-over-quarter due to a 19% decrease in average variable power costs.

The increased amount of energy available from regional hydro resources contributed the average cost of purchase power being 41% lower than in the first quarter of 2010. To take advantage of lower market prices, PGE’s thermal generation was economically displaced. Our thermal plants supplied 24% of PGE’s total system load in the first quarter, compared to 50% last year. During the first quarter of 2011, PGE’s generating plant availability was 98% compared to 95% for the same period of 2010.

Now onto hydro. It has been cold and very wet in the Pacific Northwest during the first quarter of 2011. Energy received from PGE owned and long-term contracted hydro-resources was 16% above normal in the first quarter of 2011. This compares to a 21% below normal in the first quarter of 2010. With cooler than normal temperatures and increased precipitation, PGE received 40% more energy from hydro generation quarter-over-quarter.

Hydro generation received from the PGE and resources in long-term contracts positively impacted our financial performance by approximately $4 million pre-tax in the first quarter of 2011, compared to a negative impact of approximately $11 million pre-tax in the first quarter of 2010. With river runoff currently at 120% normal, we expect energy received from hydro generation to be above normal for the full-year 2011.

Now onto wind. We have increased our installed wind generation with the completion of Biglow Canyon Wind Farm. By completing the last phase of the project, Biglow now has the total of 450 megawatts of main play capacity. 2011 is the first benchmark year for Oregon to renewable energy standards. With the completion of Biglow Canyon, we are supplying to 10% to 11% of our retail load with RES qualified resources, well ahead of the 2011 5% benchmark.

I’ll now update you on a few regulatory items, starting with our power cost adjustment mechanism or PCAM. For 2011, the PCAM deadband range is from $15 million below to $30 million above the baseline for net variable power costs. Through March 31, actual net variable power costs were approximately $19 million below the baseline. This compares to being $7 million above the baseline in the first quarter of 2010. Net variable power costs for the year are currently estimated to be below the lower deadband threshold with PGE estimated fee slightly exceed our regulated earnings cast of 11% return on equity. We have reported an estimated refund to customers of approximately $4 million as of March 31.

Now we’ll move onto SB 408. In March, Senate Bill 967 was introduced into the Oregon legislature. The bill passed in the senate in April and will move to floor of the house for a full vote, which is expected to be on Monday, May 9. If Senate Bill 967 is enacted into law, it will repeal the annual tax true up requirements. The OPUC will continue to calculate and include income taxes for both current and deferred in regular rate making proceedings. We will monitor SB 408 as it progresses through the house, until the bill is fully enacted we will continue to acquire the OPUC’s SB 408 temporary rule that were issued in February 2011. For both 2010 and 2011, we estimate neither a material refund, nor collection for customers.

Now onto financing and liquidity. We are active in the wholesale marketplace entering into forward contracts for natural gas and power to mitigate commodity price volatility for our customers. As of March 31, we posted $206 million in collateral with wholesale counterparties which consisted of $80 million in cash and a $126 million in letters of credit. As contracts settle as market pressures remain unchanged, we anticipate that about 57% of collateral posted will roll off by the end of 2011, which consists of approximately $87 million in lines of credit and $30 million in cash.

We have $600 million in revolving lines of credit of which $453 million was available at March 31. At the end of the first quarter, we had no commercial paper outstanding and no direct draws on the revolvers. While we target a capital structure of 50% debt, 50% equity, periodically we are higher or lower. On March 31, our equity ratio was 48%.

For 2011, we estimate capital expenditures will be approximately $310 million and estimate similar levels for 2012. These projected amounts do not include capital spending associated with Cascade Crossing or the RFP generation projects outlined in our IRP action plan. As capital spending for construction of new generation resulting from the IRP competitive business bidding process could begin mid-2012 at the earliest.

In closing, we continue to focus on financial objectives that support our core utility business and growth initiatives, including improved ROE and earnings performance, maintaining adequate liquidity and a strong balance sheet to support our investment grade credit ratings. Jim?

Jim Piro

Thank you, Maria. First quarter 2011 performance reflects our continued focus on operational excellence, including flexibility and effectiveness in our power supply operations and prudent management of our operating costs. We are moving forward with implementation of 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’d now like to open the call for questions.

Question-and-Answer Session

Operator

Absolutely. (Operator Instructions) And we’ll go first to Eric McCarthy with Praesidis Asset Management.

Eric McCarthy – Praesidis Asset Management

Hi, good morning.

Jim Piro

Good morning, Eric.

Eric McCarthy – Praesidis Asset Management

Quick question, I know there is no such thing as a truly normal quarter when it comes to the variability hydro, but if you could sort of quantify the – maybe the benefit that we got from not dispatching fossils modifying [ph] hydro and put it on a sort of a normalized basis and then the same with the sales?

Jim Piro

That is challenging question but just, I’d say there is two impacts of hydro, one is the increased generation at our hydro plants and the hydro contracts we have. And then secondly, when we have increased hydro in the region that drives down wholesale prices. So there is kind of a multiple effect to that. Maria, do you have any details on that?

Maria Pope

Sure. And as we mentioned, the impact of the additional water flow on our hydro resources was about $4 million. And if you take a look and compare that to more normalized power prices in the region, had those been in effect, the number would have been about twice that positive impact.

Eric McCarthy – Praesidis Asset Management

Okay, so…

Maria Pope

About $8 million.

Eric McCarthy – Praesidis Asset Management

Okay. The increase dispatched from the hydro or hydro resources that we benefited within about $4 million, and…

Maria Pope

And if it had not been for the impact of hydro which would substantially reduce power prices in the Pacific Northwest, as Jim mentioned and we had more normalized those power prices over the quarter, you probably would have seen about double the impact from that hydro flow. So net about $8 million.

Eric McCarthy – Praesidis Asset Management

Okay, brilliant. And then how far – what’s the PCA [ph] deadband this year which before we had to start sharing with customers?

Maria Pope

Sure. As you know this was an initiative which we took on to reduce our breadth from the downside at our last rate case and we now deadband ranges which are between $15 million and $30 million. And as we mentioned, we’re roughly at about $19 million. So we’re estimating that we will be refunding with customers and sharing about $4 million for the quarter.

Jim Piro

As a result of the last rate case, those deadbands are now fixed, wherein prior to the last rate case, they were kind of moving targets. $15 million is on the good side, $30 million on the negative side.

Eric McCarthy – Praesidis Asset Management

Okay. So that can be broken down by quarter, it’s not – if we sort of under earn next quarter, it doesn’t bounce out of the quarter (inaudible).

Jim Piro

It’s a full-year.

Maria Pope

Its full-year.

Jim Piro

It’s a full-year cap.

Eric McCarthy – Praesidis Asset Management

Okay.

Maria Pope

So it adds a little bit as a cushion [ph].

Eric McCarthy – Praesidis Asset Management

Okay. And then just to confirm, the sales were 10% overall but if we weather adjusted that, that’s about 3%, is it better?

Maria Pope

Yes.

Eric McCarthy – Praesidis Asset Management

Quarter-over-quarter.

Maria Pope

Quarter-over-quarter. And we are estimating about 1% for the full-year. And just a cautionary note with regard to that, with the low power price, we have seen customers that are not on cost of service and impacting our bottom line pickup their usage. As Jim mentioned, it was largely high tech and then one popular paper customer.

Eric McCarthy – Praesidis Asset Management

Okay, all right, thank you.

Jim Piro

Thanks, Eric.

Operator

Our next question will come from Sarah Akers with Wells Fargo.

Sarah Akers – Wells Fargo

Hi good morning.

Jim Piro

Good morning, Sarah.

Sarah Akers – Wells Fargo

On the peaking RFP, you have an online target date of 2013 to 2015. Can you comment on that timeframe in kind of what are the factors that would drive the need for ‘013 online date versus ‘015 or are there other factors like cost that come into play? And then also what is the online target date of Portland self-build option in the peaking RFP?

Jim Piro

The timing of when those peaking resource comes on is really going to be dependent on what shows up in the RFP process, as to when those resources maybe available. To the extent, someone already has excess capacity willing to sell into the RFP, we would probably move sooner to acquire that, because we do have a shortfall on capacity. So a lot of its going to be dependent on the characteristics of the each bid in the RFP and when those resources will be available. Our general sense is that the self-build option were to be successful, we’d be looking at late ‘013 early 2014 timeframe to get a new resource built. And that’s assuming that the RFP gets completed by the first quarter of 2012.

Sarah Akers – Wells Fargo

Okay, great. And then switching to renewables, given the recent improvements for wind turbine pricing, does that impact your plans or thinking on the timing of the new wind resources? And then related to that, can you discuss, kind of your ability to use the REX [ph] to meet the RES deadline and what factors you’re considering that would determine whether or not you go that route?

Jim Piro

So let’s talk about the wind turbine, yes, wind pricing turbine, turbulent pricing of wind turbine has kind of moderated a little bit just with the exchange rate impacts as well as just the market. The timing of the RFP for renewables is really dependent and that’s identifying a good self-build option. We went through the RFP before we renew renewables, we didn’t include the self-build option and we thought the bid just were way to high and too expensive for our customers given what we thought the market value for those types of resources were.

So one of the issues around the timing of the RFP for renewables is that’s been able to identify good self-build option, so that we can feel like we have a rigorous process to ensure that we get the best pricing for our customers. So that’s kind of where we are in that and we have not yet identified that self-build options, but we’re still working on some alternatives in taking to developers about that. As to the REX, in the last IRP process, the commission did want to explore our ability to use REX to meet the RES standard. And we wouldn’t do to meet a large percentage of that standard, we could use it to fill in where we’re short or where we have some holes in our commitments, our client commitments. So we are looking at that but my sense is those tend to be year to year and we would try to look at those just to fill in. But we are looking at REX also as a way to meet our compliance requirements under the renewable energy standard.

Sarah Akers – Wells Fargo

Okay, great. Thanks.

Jim Piro

Thanks, Sarah.

Operator

We’ll now here from Stefka Gerova with JP Morgan.

Jim Piro

Good morning.

Operator

Stefka your line is open. If you’re on speaker phone, please press mute function or pickup your handset.

Stefka Gerova – JP Morgan

Sorry about that.

Jim Piro

It’s okay. Go ahead Stefka.

Stefka Gerova – JP Morgan

Good morning and congratulations on strong results this quarter. I had a question about your assumptions for the full-year build load of 1% and Maria, you talked a little bit about that in your answer to Eric’s question. But I am just kind of curious what your rational is behind that assumptions given the strong pickup that we’ve seen in the first quarter, and do you expect some of the pickup on the industrial side, whether that’s from the Portland paper customers or from the high tech customers to go away for the balance of the year to not be there?

Maria Pope

Sure.

Jim Piro

Let me just give you a comment on the paper customer, because what we work with – we work with our paper customers to try to find opportunities for them to take advantage of low prices in the energy markets. And so they can kind of scale their production up and down based on energy pricing to help them be more competitive. That’s related to one of our paper customers. And so that can fluctuate their usage of our product, but as Maria mentioned, it produces minimal margin for the company. So Maria, would you like to give more detail on the overall load forecast?

Maria Pope

Sure. And given the low market prices of power right now, we made estimates for the full-year looking at the opportunistic usage that we probably saw pickup in the first quarter versus what’s underlying economic growth. And we previously had accepted flat load for 2011 and have revised our estimate of 1%. But we continue to see challenges within the economy, while job growth in Oregon has improved and particularly versus the national average. We still are coming out of a very difficult recessionary period, and we believe that 1% is appropriate number.

Jim Piro

There have been some good announcements in our service territory, as you know Intel announced a major expansion in their facilities. The solar companies are doing well in their business model. So there has been some bright signs but this is going to be a slow recovery as we work through this challenging period.

Stefka Gerova – JP Morgan

Okay, fair enough. And what was the sales assumption embedded in your last rate case?

Maria Pope

It was roughly flat load from 2010 to 2011 which is our past year.

Stefka Gerova – JP Morgan

Okay, great. Thank you very much.

Jim Piro

Thank you.

Maria Pope

Thank you, Stefka.

Operator

(Operator Instructions)

Jim Piro

I think we’re done.

Operator

No further questions Mr. Valach.

Jim Piro

Okay, thank you very much everyone for attending. We appreciate your interest in Portland Generic Electric. And invite you to join us when we report on second quarter 2011 results. If you have any additional questions, please contact Bill Valach, who will be available after this call. Thank you again for joining us today.

Operator

Thank you. And again ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation.

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