Good morning, everyone, and welcome to Portland General Electric Company's Second Quarter 2022 Earnings Results Conference Call. Today is Thursday, July 28, 2022. 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.

For opening remarks, I would like to turn the conference call over to Portland General Electric's Senior Director of Finance Investor Relations and Risk Management, Jardon Jaramillo. Please go ahead, sir..

Thank you, Jonathan. Good morning, everyone. I'm happy you can join us today. Before we begin this morning, I would like to remind you that we have prepared a presentation to supplement our discussion, which we will be referencing throughout the call. The slides are available on our website at investors.portlandgeneral.com. Referring to Slide 2.

Some of our remarks this morning will constitute forward-looking statements. We caution you that such statements involve inherent risks and uncertainties, and actual results may differ materially from our expectations.

For a description of some of the factors that could cause actual results to differ materially, please refer to our earnings press release and our most recent periodic reports on Forms 10-K and 10-Q, which are available on our website.

Leading our discussion today are Maria Pope, President and CEO; and Jim Ajello, Senior Vice President of Finance, CFO, Treasurer and CCO. Following their prepared remarks, we will open the line for your questions. Now it's my pleasure to turn the call over to Maria..

safe, reliable, affordable, clean energy with customers at the center of all we do, enabling their well-being and the advancement of the communities we serve, all the while creating opportunities to invest, delivering value for all stakeholders and shareholders alike. With that, thank you, and let me turn it over to Jim..

Thank you, Maria, and good morning, everyone. Moving to Slide 6. Our second quarter results reflect the strength of our service territory and a dynamic and favorable power market as well as broader economic conditions. A regional economy continues a trend of strong growth. And within migration, industrial development, all driving rising demand.

You saw the unemployment rate in our service territory declined to 3.2% in June of 2022 compared to 5% in June of 2021. We also continue to witness strong growth fundamentals in our service territory highlighted by high growth in the industrial sector. Overall, Q2 2022 loads increased by 1%, weather adjusted, compared to Q2 2021.

Residential load decreased 3.2% year-over-year, weather adjusted as, we began to witness a moderation from usage patterns during the peak of the pandemic. Residential customer count growth remained steady 2021. At 1.3% and compared to Q2 2021.

Commercial load decreased 1.7% year-over-year weather adjusted due in large part to decreased need for irrigation in 2022 after record rainfall during the spring. The high-tech and digital services sectors continued on their existing growth trajectory as we saw over 9.8% higher industrial lows, weather adjusted, year-over-year.

On a weather-adjusted basis, total load increased 0.4% year-over-year. Weather-adjusted retail deliveries were up 2.7% year-over-year first half 2022. Beyond the continued strength of our region, we observed; significantly more favorable power market conditions in Q2 of 2022 relative to the prior year.

These conditions, coupled with deliberate actions by our power operations team to manage purchase power and fuel cost on behalf of customers, led to improved financial results compared to last year. As we look at the broad economy, we are closely watching the impacts of inflation.

In the near term, we are managing inflation pressures on O&M by focusing on an efficient spend throughout our business and believe that O&M pressures are manageable within our current guidance. I'll note that from 2017 to 2022, our base O&M increased at a compounded annual growth rate of approximately 1%.

If one adds in non-deferrable vegetation management wildfire mitigation expenses, the CAGR is closer to 2% based on the midpoint of 2022 O&M guidance, yet I think we could do better.

As we look to the remainder of 2022 and beyond, we are focused on creating more efficient operations and effectively managing commodity risks to minimize the impact of cost pressures on customers. I will now cover our financial performance quarter-over-quarter.

We experienced a $0.05 increase in total revenues attributed to the previously mentioned increase in deliveries, led by industrial customers.

While load was up 0.4% quarter-over-quarter, the significant increases in industrial load were partially offset by decreases in residential and commercial loans, resulting in some offsetting effects due to the composition of customer prices. This created a $0.07 decrease in total revenues.

As noted earlier, Q2 2021 power cost conditions were challenging at $0.31 of the quarter-over-quarter earnings change relates to headwinds in 2021 that did not recur.

$0.19 is attributed to a more favorable power market in the current quarter driven by strong hydro conditions in the region as well as conditions and company strategies that allowed us to resell power and gas into the market at optimal times and prices.

This includes the strategic dispatch of our generation fleet, which gives us the opportunity to respond to market conditions, reducing power when it is cheaper relative to market rates and selling excess power when market prices are advantageous. This is all to mitigate risk and volatility and manage costs for the benefit of our customers.

It was a $0.07 decrease in EPS from higher operating expenses. Q2 '22 OEM drivers include $0.02 of additional wildfire mitigation, reflecting incremental work performed in 2022 to implement our recently approved wildfire mitigation plan.

$0.02 of customer service spend related to transportation electrification, enablement and enhancements to the digital customer experience, $0.02 of additional outside service and labor costs for great reliability, and finally, $0.01 decrease of higher administrative expense primarily driven by insurance cost increases.

It was a $0.04 decrease due to lower market drive returns on the nonqualified benefit trust compared to Q2 2021. Finally, we achieved a $0.01 decrease for other miscellaneous items. Turning to Slide 7, which shows our capital forecast through 2026.

We have again increased our capital expenditure forecast for 2022 by an additional $70 million, by $105 million compared to the original forecast of $650 million. This reflects additional opportunities for plant and grid resiliency investment.

As a reminder, our current investment plan calls for over $3.3 billion of capital investment over the next five years, primarily related to system resiliency and transportation electrification, but this number does not include any expenditures related to the possible RFP ownership options. Turning to Slide 8.

We continue to maintain a solid balance sheet, including strong liquidity and investment-grade credit ratings accompanied by a stable credit outlook. Total available liquidity at June 30 is $870 million, and we remain in a strong liquidity position.

We plan to fund investments from cash from operations and an issuance of $220 million of debt in -- later in 2022. This debt is expected to be issued under our green financing framework as we continue to seek out opportunities to tie our long-term debt to our sustainability strategy in capital investments. On to Slide 9.

As we look forward to our capital needs in 2023 and beyond, we are assessing the equity needs, primarily related to the potential RFP investments as well as creating balance sheet flexibility. Previously, we've discussed the long-term equity needs to rebalance our capital structure for regulatory purposes and to maintain strong credit ratings.

We believe a strong balance sheet creates important benefits to both shareholders and customers, including optimal financing costs while facilitators growth options, most notably where successive rounds of RFP investment opportunities needed to achieve the 2030 DCA goals.

While our ultimate equity needs will be linked to RFP investment opportunities, our capital structure will likely need to align the historical regulatory ranges over time. We are excited about our growth prospects for the new generation and capacity assets, which are in addition to the $3 billion base CapEx to be spent between '22 and '26.

As mentioned by Maria; we are revising our GAAP basis earnings guidance from $2.50 to $2.65 to a new number of $2.60 to $2.75 per diluted share.

We also received additional information after our first quarter call that allowed us to further evaluate our earnings guidance, particularly related to the deferral reductions recorded in Q1 2022 as a result of the general rate case order.

Importantly, we received clarification from the OPUC that reiterated that the commission has an established practice of evaluating deferrals on a case-by-case basis, and we'll continue to employ this fact-specific approach on each case going forward.

In light of this clarification, as we look ahead to the second half of '22, we are also initiating non-GAAP basis adjusted earnings guidance of $2.74 to $2.89, which excludes the impact of the release deferrals associated with the year ended 2020. The second quarter results reflect continued loan growth and strong power cost performance.

As we will pass the midpoint of the year, we remain focused on strong execution for the balance of 2022. We anticipate continued economic growth in our region, driving weather-adjusted retail load growth of 2% to 2.5%, led by continued high tech and digital growth and continued in-migration.

We will further employ our power cost framework, which yielded successful risk management strategies in the second quarter and helped dampen the impact on customer prices and the runoff of commodity prices in the current year.

Operating cost challenges remain, and we are continuing to take proactive measures to manage O&M for the remainder of '22, including continued focus on operational efficiency and high-return O&M activities, playing technology and digital solutions to manage customer needs while optimizing performance and managing costs.

I am confident we are on the right track as we continue to drive efficiencies through the end of the year, which, coupled with continued load growth, will allow us to achieve our long-term earnings guidance growth of 4% to 6%. We will evaluate this growth rate as we get certainty around the RFP process.

I'm optimistic our outlook for the second half of '22 and beyond is strong. Our near-term growth, investment opportunities and the ability to raise capital for growth is also strong. The ongoing commitment to providing clean, reliable and affordable energy and long-term focus to decarbonize the grid and electrify the economy is unwavering.

And we have established a framework for PGE to accomplish our long-term financial goals and deliver value to our customers, investors and communities. And now, operator, we're ready for questions..

And our first question comes from the line of Julien-Dumoulin-Smith from Bank of America. Your question, please..

It's actually Ryan on for Julien. The update -- appreciate the update here.

So maybe just on that last point, Jim, in terms of revisiting the longer-term growth rate is final resolution of the RFP process, the only gating item at this point? And any other considerations that are kind of more dynamic in nature and factoring into how you think about things?.

Yes. Thanks, Ryan. I think that is the net item for us. We'll determine where we are with the RFP awards in the fourth quarter. We'll focus in on a more precise vision of our financing plan. And obviously, we're modeling scenarios now. But we're already operating, as you all know, and see the new guidance in the plus 5% range right now.

So we're comfortably inside the current guidance, and I think the RFP will give us an opportunity on balance to grow the growth rate even more. So, yes, in a word..

Excellent.

Any shift in the macro backdrop that's impacting the process and how you're thinking about ability to participate here?.

Maria mentioned that bidding is being refreshed. And it's probably no surprise to anyone given what's happening in the macro environment with the cost of money, supply chain issues, inflation and the like. And so we think that's a natural part of the process.

We think it could be dispatched pretty quickly, and we still are confident that we can get resolution by the end of the fourth quarter with awards in place. but the macroeconomic environment, to no one's surprise, is affecting these bids as you might expect..

Yes. Understood.

And then maybe just lastly any way to quantify how you're thinking about the impact of getting rid of decoupling here and how that could factor into your longer-term trajectory?.

Yes, good question. Clearly, we have a stub year that we're present in new rates and the decoupling mechanism elimination, although there's a tracker there. You probably have seen that for the balance of the year. It reflects a year where it's not fully effective, let's put it that way.

So starting next year, the lack of decoupling will be fully effective. And just to remind everyone, we bargained for that result because we think on balance, we're one of the growth tier ier utilities, so if I can use that word. There's tremendous growth tier.

So I think that we want to be able to realize on that return capital to invest in the business. I don't have a quantification for you right now. Look for that in the year guidance that we'll publish in February of '22 -- 23, pardon me..

Thank you. One moment for our next question. And our next question comes from the line of Insoo from Goldman Sachs. Your question, please..

Good morning, Maria. First question, I guess, as we think about '22 and the guidance and performance for the year and into '23 as well. So I guess the adjusted guidance, excluding the regulatory items and with the strong performance on the power side, kind of gets you back to where the original guidance was for the year.

I guess, the power benefits offsetting maybe some of the O&M inflationary aspects. And if I heard it correctly, your third quarter is set up pretty well. It seems just from a power side as well.

How are you trying to think about positioning for '23, whether it's pull forward of more costs? And how much of that lever do you have? And on a '23 versus '22 basis, do you -- any initial indications of whether you're more like better positioned or roughly the same as when you started off the year?.

Sure. So -- and so your analysis of where we are, is spot on, and it's a good question. So we are doubling down on our focus on costs, and it's really important that we continue to invest in the business but also to lower costs at the same time. It's important for customers, and it's important for our results overall.

With regards to power costs, we are really focusing on technology that will give us better visibility across the market, better tools to be able to manage in a more volatile environment and as well as making sure that we have the kind of hedges and mechanisms in place that can really protect the Company and customers from spikes that could come as a result of scarce power supply, high heat events or extreme cold that we're seeing.

So we're really living in a much more volatile environment. And therefore, the power operations practices we have the hedging that we do and overall management and visibility is really important.

There's no question that we as well as everyone in corporate America is facing increased inflation, labor issues and challenges that we haven't seen in a long time in our economy, and we're recognizing and hitting them head on..

Just to add one thing, Insoo, we anticipate transitioning to the adjusted-only presentation into '23, right? So please keep our framework today in mind as we go forward there..

Yes. No, that makes sense. As you talk about the potential for additional investments through the RFP and the equity financing needs that may take place.

As we think about just the I guess, the legislative potential build in the hopper right now as of last night and the different components of it, any initial look on the net impact to the financing considerations if whatever versions out there were to take place?.

Sure. So I think on the energy side, there's still a lot to work through. As you know, we have been strong advocates for a clean energy policy at the federal level, everything from sort of test neutral to the ability for utilities to utilize investment tax credits on an equal playing field.

We also are really encouraged with what's happened with regards to chipset, and so what you may not realize is that about 15% of semiconductor manufacturing actually takes place in Portland General service territory. Intel has very large operations, and much of their R&D is done here.

In particular, they're investing in their advanced lithography, and we have several other companies who service the semiconductor industry or who are semiconductor manufacturers themselves who are increasing their investments.

And you can see our quarter-on-quarter growth in that area, and we would expect it to only continue and to be quite robust, not just for the next couple of years, but really for the decade to come..

I think, Insoo, the prospect of legislation, the so-called mentioned tumor arrangement from last night, the inflation bill portends potentially significant benefits with PTC, ITC extensions and the like. And so I think this plays into our strategy very, very well as does IIJA, which we've been examining for a number of months now.

So yes, we have a lot of capital to deploy. Yes, that will bring a lot of financing. But I also think that these legislative tailwinds if they become enacted, it could be very significant for us..

Got it.

Just to clarify, I guess, based on what's out there relative to, I guess, the potential amount of equity needs that you had modeled in, would this potentially reduce that? Or would there be not much of a change?.

Well, I'm assuming now that we are sort of on our own until we see the tangible benefits coming out of Washington, right? So we'll be sizing our needs based on the RFP awards and in addition to the balance sheet strengthening that I mentioned relative to the ratios that we'll have to achieve over time.

And it's our very, very strong belief that we should be keeping stout investment-grade ratings and stable outlooks because we have the next seven years in front of us, not the next two or three only, test of RSP opportunities. So we want to go into that period to achieve the 80% DCA goals through investment in a very strong financial part..

And our next question comes from the line of Sophie Karp from KeyBanc. Your question, please..

I just wanted to ask you about the potential for, I guess, tax credit transferability or direct pay that I understand is there somewhere in that bill. I appreciated 700 pages and you probably it into.

But historically, I think you were a little bit of disadvantage versus some of the non-regulated entities when into renewable projects because of tax treatment.

And does that change things for you potentially where it levels the playing field?.

Sure. Sophie, first of all, thank you for the question, and you're right. We do have production tax credit carry-forwards. Direct pay would be beneficial.

It's our view that actually a level playing field to be able to utilize the same investment tax credits for solar battery storage and other mechanisms that don't put regulated utilities at a disadvantage is the most important aspect of the legislation going forward. We remain very encouraged.

And I would add that we're very fortunate that our senior senator from Oregon, Senator Wyden, has been front and center in the negotiations as Chair of the Senate Finance Committee, and we've been in contact with them as late as last night.

So it's -- this is something we're spending a lot of time on and are deeply involved in it will make a difference to our business..

Thank you. One moment for our next question. And our next question comes from the line of Anthony Crowdell from Mizuho. Your question, please..

Jim, I just want to make sure I heard correctly. I believe you said going forward, the guidance will be the guidance that you will be providing is on a non-GAAP basis.

Is that correct?.

Yes, I mentioned that you should anticipate that we'll carry on with that basis into 2023..

So Jim, what you're saying is that we'll have -- we will exclude items that might be extraordinary or unusual and not reflective of the overall run rate of our business..

That's right. In order to provide more transparency and really to demonstrate what the actual earnings power of the underlying businesses..

Great. And just I'm just referencing Slide 6 on this question. If I look at the biggest variation here, it's mainly related to PCAM. And at least for me, it's -- I struggle. It's a challenge for me to forecast it.

Any thoughts to maybe excluding the PCAM, whether it's a plus or a minus from the non-GAAP measure just to highlight the strength in earnings of the utility? Because sometimes it may be up or down. It may get distorted by the PCAM on the non-GAAP.

Any thoughts on excluding it?.

Yes, I really appreciate the question because as I look at the volatility year-over-year, right, I understand exactly why you asked that question. It did not occur to us this first time out, if you will, using adjusted earnings to do that, but maybe we can examine how to make that more transparent.

Just gives me the opportunity to say, but there are dramatic differences year-over-year in terms of weather, we had a nice cool spring, we had wonderful hydro. Last year was the absolute opposite. We had enormous heat dome at 16 degrees. And when you flush through these activities and the mechanism, it really demonstrates the volatility of that.

So we look at the mechanism all the time, and we'll take into account your question about how to present that. Certainly, the quarter-over-quarter differences suggest the same question to us..

And just lastly, a quick follow-up. On the loan growth guidance that you have for this year, maybe going forward, are you guys assuming pre-pandemic levels? I know there was a change in the customer mix here on the margin.

But is guidance based on the pre-pandemic level? Or you guys have altered it?.

So overall, our guidance represents really quite extraordinary growth in the high-tech and digital areas. In particular, I noted the semiconductor company is expanding in our area. What you'll also see is commercial has been a little bit slower to come back than we would have expected, and we do see slower growth probably in the residential side.

But overall, our mix is certainly shifting, and that provides opportunity not only to spread our fixed costs over higher levels of growth, but particularly the semiconductor business requires pretty substantial investment..

Thank you. One moment for our next question. Our next question comes from the line of Aditya Gandhi from Wolfe Research. Your question, please..

You actually have Steve Fleishman here.

Can you hear me okay? Jim?.

Yes..

Sure. Okay. Sorry to sneak in there. So I have a couple of questions. First, just, Jim, you mentioned kind of getting the equity ratio back to what's in your jurisdictional rates.

Could you just give me -- give a sense of where the equity ratio is now? And how much equity you might need to get it to kind of to the level that's in your jurisdictional rates?.

Yes. The first question, Steve, is pretty easy. It's -- we estimate by the end of 2022 pro forma here will be a Scotia over 46% on a regulated basis of 50%. In terms of getting it back, it depends on how we do this and how much time we have to do this.

Typically, a point of equity is close to $100 million, right? But that depends on so many other things. it depends on how we grow the Company otherwise to the RFPs and the like. So I wouldn't necessarily just kind to take that out at four points..

Okay. That's helpful. And then on the RFP itself, you mentioned the inflation aspect and just which, I guess, to the degree you win them means more rate base growth opportunity.

And -- but just is there any way to get a sense of how meaningful the increase related to that might be in terms of like inflationary changes from what you would have thought before?.

Right now, Steve, those prices are being refreshed. And directionally, the bid package, I could say, is higher than the last time we went to the market back a few years ago. So they were already higher than the base of what we saw a few years back, and now I suspect they'll be refreshed upwards a little bit as well.

I don't have an exact number for you now. We're still in the process of getting those new bids refreshed..

Steve, as you can see from the materials, we do have a number of bids. We have PPA options. We have company-owned options, and we have hybrid options. It's a robust and very competitive environment. And when you go back out to refresh bids, things could change..

Okay, okay. So it's hard to figure out kind of where the -- okay. That's helpful.

And then just in terms of, I guess, more broadly between the equity needed to kind of get the balance sheet back to the 50% plus this growth that if you do win the RFP, just how are you thinking about -- I mean have you thought of some options other than straight equity, I guess, to facilitate that? How are you thinking about getting all that funding?.

Yes, Steve, we've really focused on this a lot lately and get a lot of inbound questions about it because we could see a very large opportunity here, right? And I want to make sure we do this in the most non-dilutive way as we possibly can. I will tell you that equity forwards make a lot of sense.

The projects are going to be delivered on a build-on transfer basis. We'll be making progress payments on them. If we're awarded them next year in '23, most of them will be delivered CODs in '24. And so the big funding requirement is in '24 and the equity forward, I suspect and as the market program makes sense as we fill in the needs that we have.

So that's my sense right now of technique. The amounts are to be determined. As I said a moment ago, we'll trigger that off for the actual RFP awards, and we want to make sure that we principally position ourselves here with growth, and over time, managing that equity ratio.

There's no immediacy and no immediate pressure to do that balance sheet work, and I'd rather do it in concert efficiently issue when we have both the growth and the balance sheet stuff together..

And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Maria Pope for any further remarks..

Great. Thank you very much for joining us today. Before we finish up, I'd like to thank Dave Robertson, our Vice President of Public Policy, who has announced his retirement and is leaving us at the end of the month after 18 years of extraordinary leadership at our company.

He's been responsible for much of our clean energy future and the legislation that we benefit from today. We welcome Nick Blosser, who joins us most recently from the Biden administration in the White House, and prior to that, was a key member of the Governor's office here in Oregon.

Welcome, Nick, and we look forward to working with you in the public policy and communications area. Today, we appreciate your interest in our company and hope to connect with you in the near future at some of the investor conferences and please follow up. Thank you very much. Bye-bye..

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Have a good day..