Good morning, everyone, and welcome to Portland General Electric Company's First Quarter 2023 Earnings Results Conference Call. Today is Friday, April 28, 2023. [Operator Instructions]. For opening remarks, I will turn the conference over to Portland General Electric's Senior Director of Finance, Investor Relations and Risk Management, Jardon Jaramillo. Please go ahead, sir.

Thank you, Valerie. 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 the prepared remarks, we will open the line for your questions. Now it is my pleasure to turn the call over to Maria.

Thank you, Jardon, and good morning. Thank you all for joining us today. Beginning with Slide 4, I'll start by discussing our first quarter results and speak to the key drivers. For the first quarter, we reported GAAP net income of $74 million or $0.80 per diluted share. This compares with first quarter 2022 GAAP net income of $60 million or $0.67 per share. Our non-GAAP net income of $72 million or $0.81 per share. There are 3 primary drivers of our results this quarter: First, we continue to see good load growth. Industrial load, in particular, increased over 8% quarter-over-quarter, as high-tech sectors and steady expansion in the region continues; second, our power costs have increased both as a result of load growth as well as higher natural gas and power prices; and third, cost management remains a key priority, and we expect largely flat O&M for the full year, excluding the impact of Wildfire and major deferrals as was the case this quarter. In addition, our Q1 results reflect the impact of a $300 million draw from our equity forward, which was completed on March 1. This draw is an important step for our Oregon's clean energy investment and in resetting our balance sheet for growth ahead. 2023 earnings is forecast to be in the range of $2.60 to $2.75 per share, and we remain confident in our long-term earnings growth rate of 5% to 7%, driven by strong load growth and customer growth as well as attractive capital investment profile and improved operational performance. Moving to Slide 5. As you know, we have been focused on bringing on new renewable and non-emitting resources onto our system, and we're excited to announce the acquisition of a company-owned battery storage project as part of our most recent RFP. Seaside…

Thank you, Maria, and good morning, everyone. I'll cover our Q1 results before providing additional details on resource planning, capital investment and liquidity and financing outlook. Moving to Slide 6. Our first quarter results reflect sustained demand growth, effective management of continued power market volatility and successful execution of our long-standing cost management efforts. Our regional economy remains solid as unemployment in our service territory held at 3.8% through Q1 2023. Development and demand amongst our industrial customer class has remained strong. We continue to see a strong pipeline of industrial customer projects, particularly high-tech and data center sites ramping in the coming months. Overall, Q1 2023 loads increased by 1.9% weather adjusted compared to Q1 2022. On a non-weather-adjusted basis, total load increased 4.7% year-over-year, as we witnessed a 9.4% increase in heating degree days. Residential load increased by 5% year-over-year, but decreased 0.9% weather adjusted, which speaks to both cold weather in our service territory and the continuation of usage patterns as our customer practices normalize in the aftermath of the pandemic. Residential customer count growth increased 0.9% compared to Q1 2022. Commercial load increased 1.2% year-over-year or 0.4% weather adjusted as commercial activity also continues to normalize. Industrial load growth remained steady in Q1, growing 8.6% or 8.3% weather adjusted with high-tech and digital customers continuing to lead the segment. While we did see higher deliveries, driven by colder than typical weather temperatures, we also saw a continuation of higher power prices. Execution of our operational and risk management strategies helped dampen the impact of this weather volatility as intended. These conditions emphasize the resource constraints in our region and changing market dynamics that require continued collaboration among our employees, customers and regulators to address market-driven challenges. I'll now cover our financial performance quarter-over-quarter. We experienced a…

[Operator Instructions]. Our first question comes from Shahriar Pourreza of Guggenheim.

Just, Maria, starting with the remainder of the '21 RFP, is the implied capital cost for Seaside a useful proxy for that smaller 75-megawatt opportunity? And secondly, what's the time line for that? Do we have to wait for the 2Q call? Or could we get an 8-K between now and then?

Shahriar, it's Jim. I'll take that one. So the final project, the 75-megawatt project, is still under negotiation. So I won't cite an exact capital cost because we're still finalizing that. But if you look at the totality of the 2021 RFP results to date, it's been pretty much coming in as we expected, about $1,900, $2,000 a KW of installed capacity. Since we have really good current pricing from very similar storage projects, I think you can extrapolate pretty easily what that project could come in at. But until that contract is signed and inked, we have an agreement on the actual capital cost we'll have to extrapolate. But I think it's pretty easy right now.

Got it. And then you guys proposed to modify the PCAM in the case realized. It's obviously early innings, but maybe at a high level, is this something we could see parts of get through? Or is it an all or nothing process, I guess, put differently, could we see changes to the sharing ratios but not removal of the dead bands? Just trying to understand what the pathways forward are here?

Sure. So first of all, I think it's too early to speculate where we'll end up. But the proposed changes to the PCAM represent pretty significant changes to the power markets as well as to reliability. So when we look towards the Western resource adequacy program, we look at how power markets are operating today. It's time to update and bring to date really this mechanisms that we've had in place for a long time. So it's an important set of changes not only for the company but also for the customers, and we look forward to working collaboratively with parties.

Perfect. That was all the questions I had. Jim, congrats on sort of Phase 2 of your retirement. I think you're obviously a little too long to retire, little to long to retire, but we'll discuss that over drinks.

Thanks, Shahriar.

Our next question comes from the line of Julien Dumoulin-Smith of Bank of America.

And Jim I wish you the best of luck. I'm sure I'll see you more around here. And Ben, best of luck to you. It's pleasure indeed.

Thank you.

Just following up here quickly on the ATM, I saw the $300 million. I just -- how do you think about the timing related to that? I typically wouldn't ask. But obviously, you've got a pretty steady cadence of potential CapEx revision higher here such that you could really need further capital revisions and further capital injections later. How do you think about sort of the cadence of the new equity raise here?

Yes, good question. So let's go back to basics from the October offering, right? $500 million. Let's -- and part of the proceeds there was to reduce debt. So we dramatically improved our ratios and the like. About -- I would say about $300 million out of that $500 million offering address the balance sheet. And closing the quarter here, we're getting close to 49% equity. So mission accomplished, right? And then we had a little more than a $400 million investment in Clearwater. And so therefore, a couple of hundred million dollars is applied there. So between the balance sheet and Clearwater, those proceeds are being applied towards progress payments and the like and strengthening the financial condition. With respect to the new projects going forward, they're very substantial equity investments. And frankly, looking ahead to closing out the project that we haven't signed yet, pretty much going to size that ATM to capitalize these new projects going forward, including the debt that we'll issue towards the end of this year in the second half, I would say. So that will help us as we go. The ATM will last us through the termination period of the registration statement, which is August 2 years hence, so a little more than 2 years to go there. And of course, the equity forward is a 2-year arrangement. So I think we're well set up between these 2 transactions to capitalize everything that we need, including having fixed the balance sheet and the strong prospect of this final 75-megawatt storage project. So you're quite right. In the implication, we need a lot of financing, but we're now set up to do that. And of course, I'd like to go into the 2023 RFP, seeking projects in 2024 with a little bit of tailwind, so we can confidently bid on those projects as well.

Right. And Jim, if you can clarify this. I mean I know the 2-year forward structure. But as you say, you've already sort of allocated the equity you raised last fall. I mean is the dilutive impact as you think about this spread out over to? Or do you think that this is more concentrated on the far end of that just to make [Technical Difficulty]?

It will definitely be spread out over a couple of years. And the reason being is that the way we're going to fund these projects is based on progress payments as these projects are delivered with milestones to us. So on a quarterly basis, these company-owned projects will require progress payments to the contractors and vendors that we have that are delivering them. So there's a schedule of these things, and then we'll be drawing against the equity and debt that we have to pay those bills. Plus, don't forget, another $800 million of kind of base capital that's inherent in the plan. So with this year's $1.3 billion and next year's increase in guidance, we have a very substantial capital plan here that's running, call it, 3x depreciation.

Excellent. And just two quick clarifications, if I can, related to, first, industrial loads still intact, not seeing any pullback from the tech side of the equation. Just want to clarify that. Obviously, you guys have Intel and others in new service territory. And then related here, percent expectation on the win for future RFPs. I mean you guys want a pretty hefty amount here proforma for that last project. Still confident about what that means for future RFPs?

So on the first point, I see, we see load growth in the industrial sector proceeding along at mid- to high single digits as we go. And I'm sure Maria will comment in a minute. And then quickly on the second question, yes, I cited 61% win rate on this last RFP, but I really can't speculate on the go-forward. It's just too soon to tell. We haven't even issued the RFP yet. So standby for that. So...

Julien, on the load side, we continue to see load growth really across the board. Our migration continues, customer count was up just slightly shy of 1% in the first quarter, and that's the winter quarter. We also continue to see the commercial come off, while in residential is down a little bit in terms of usage is that reflecting people really back to work and post-COVID environment. And for the last several quarters, really, the story is all about industrial growth. And we have about 15% of the semiconductors that are manufactured in this country are manufactured in our service territories. So there are many of those manufacturers, who are adding to their current facilities and expanding, in addition to what you see across many aspects of the country, which is digital and cloud computing organizations, expanding their operations.

Data centers in this neighborhood are going to generate demand for 150 megawatts of new load this year alone, just as an example.

Our next question comes from the line of Sophie Karp of Key.

And Jim, you will be greatly missed when you retire. A couple of questions I have here. So on the PCAM request, I was wondering if you can remind us the regulatory history of this. Specifically, if you requested in the past to have it modified and what the outcome was, sort of trying to glean how much appetite the stakeholders might have for modification of this loan entrenched mechanism?

Sure. That's a great question. And first of all, we've had that -- this mechanism in place even before I joined the company. And it really related back to the Boardman coal plant and the idea of risk sharing in terms of operating performance for a plant where there were a lot of operating aspects to it. Today, where our thermal deployment is fixed and actually more variable when the wind is not blowing, the sun is not shining, the mechanism no longer really applies what it's largely a renewable-based system based on wind, solar and other natural resources as well as the import and export throughout the entire Western Interconnect to maximize renewable resources across the market footprint of the entire West. And when you also look at the reliability concerns that we as well as every aspect of the country have for resource adequacy and the advances that the Western Power Pool has made getting their FERC approval last quarter and moving forward towards the Western resource adequacy program, it's really time to take a wholesale relook at the mechanism is not common across the industry. In fact, we're a far outlier, and we look forward to working with parties to figure out a mechanism that will work better going forward in this new environment, or I should say this continually evolving environment.

Right, right. And that's a very helpful color. And then just a high-level question about the service territory. I'm wondering if you see any shift in the kind of demographic trends in your territory where I don't know, historically, you relied on the population inflow, right? And is that still the case? Is that maybe changing where industrial commercial load will be the main driver for you going forward? Just kind of curious if there's any change there.

It's also a good question. There are several different reports that have different data with regards to in-migration. What we continue to see is in-migration that is at or a little bit higher than the integration that we've seen over the last decade. So north of 1% in-migration. What we also are seeing is continual advances in renewables that is attributed and that's actually part of our strategy. And as you may know, this area has long had a history of energy conservation, and we're one of the leaders in terms of that area, not only as the utility, but as an entire state. So I think you'll -- we will not see as much load growth from residential or commercial. And so most of the load growth will come from industrial, but we'll continue to see customer growth. The one area that -- that's not included in that is electric vehicles. We're the fourth largest market for electric vehicles and have the second highest penetration in the country. And we have a number of, I think, tremendous opportunities with some of the IRA dollars going to our customers, who are already looking to expand their use of electric vehicles. And in particular, we have a number of fleets who are looking at last mile delivery, and Daimler has their electric truck manufacturing actually located in our service territory as well. So there's a lot of moving pieces in terms of the load side, but most of it continues to be fairly robust. We believe in our 2.5% to 3% load growth for this year in our long-term forecast.

Our next question comes from the line of Anthony Crowdell of Mizuho Group.

And Jim, congratulations. Tom Brady also retired too, I guess.

Okay. Thank you for that.

If I could follow-up to Julien's question, but maybe flip the question around. And this is related to the success that company has had in winning the RFPs. The 39% that maybe the company did not win, could you talk about -- was it strictly on price that the company didn't win? Or are there other factors to how the company was not successful in that 39% of the bidding?

There's a lot of factors come in. We do -- we take a broad look and work with an independent evaluator. And so it's the least risk, least price, and all these factors come into play. And it's a fairly transparent process with the independent evaluator and the commission. So I do think that the competitive nature really helps deliver the best projects for the best value for customers over the long term.

Great. And then if I could just pivot I think a trial began earlier this week related to some wildfire damage associated with another utility in the state. I think it was Pacific. Just curious if that creates more scrutiny on Portland? Or does that provide an opportunity for more spending for resiliency?

Well, we can't comment on anything that's going on in terms of litigation, whether it pertains to ourselves or any other utility. And I think, if you look at wildfire, we're really focused on doing the right thing, making sure that we're protecting our customers, investing in our grid, and we have a good solid program that we've developed over a number of years.

[Operator Instructions]. Our next question comes from the line of Travis Miller of Morningstar.

Congratulations, job well done, Jim.

Thank you.

Question on the Seaside. What's the rate timing in terms of recovering that investment that you're thinking about? Would it be a lump sum in a rate case in 2025, 2026? Or is there a chance to get payments along the way?

All of these projects, Travis, are eligible for AFUDC. So that's starter. Secondly, it is our belief that projects such as this are eligible to be treated under our renewable adjustment clause. Now that clause was implemented probably 15 or more years ago. But projects like this were not really contemplated at this kind of scale or even this type, and we certainly didn't have a grid like we have today. So we have sought clarification in the recently filed rate case that the RAC, or the renewable adjustment clause, applies to the recovery of these investments because they are associated with the build-out of renewables, that's a keyword, a key phrase, a key concept in terms of deploying the RAC. If for some reason, which we don't think is appropriate, but if for some reason, it's judged not to have the RAC apply, we will have to seek ordinary rate case treatment to get those assets into rate base.

What I would also add is from an operator's perspective, these will be really important investments that will help us balance the grid, improve stability, the volatility from wind and solar is hard. And these assets couldn't come on any sooner, and we really look forward to them enhancing our increasing renewable portfolio. It will be very important as we move forward for the stability and reliability of our system.

Just to put a cap on that, Travis, the decarbonization plans we have are so significant that I don't think we can do it without these kinds of battery resources. So they are a linchpin, I believe, in the build-out of renewables and achieving the decarb plan that we have.

Okay. That's helpful. In that RAC, just as a quick follow-on. Would Clearwater also qualify? Or would it be just essentially Seaside and future projects?

The Clearwater project clearly qualifies for the RAC treatment.

Okay. Very good. And then high-level question. Hydro impact, do you expect anything material this year just based on the snowpack levels there?

Sure. so as you probably have seen in our 10-Q disclosures, we continue to have low hydro in the Columbia River and basin about 85%, 86%. That is a big deal. While [indiscernible] projects are running at 104, [indiscernible] is at 93, pricing and availability across the entire region is based on the Columbia. So we've seen a downward. If you look at the numbers, you can see an increase in thermal use in the first quarter and you see a decrease in our ability to purchase hydro. One of the things that also took place was really cold in February and March. And so all of that snowpack stayed in amounts. And so I think you'll see dramatically improvement in the second quarter. And we hope to have some of that around for the third quarter, but that's really where we will see the big impact of the lower amounts versus last year. And last year, I remember it was quite significantly above normal. In addition, we have an extraordinary situation of California having almost 200% hydro conditions as they deal with a lot of water. So all of us in the West are beneficiaries of that, in particular, obviously, California, but they haven't had these kind of conditions in 40 or 50 years.

Our next question comes from the line of Andrew Stewart Levi of Hite Hedge.

Guys, can you hear me well?

Yes, Andy.

Yes.

Good. Okay. You're retiring Jim, you don't retire. You've done a really amazing job. So I thank you for that and I thank Maria for hiring you and the guys you are actually really nice and happy team together. So...

Thank you, Andy.

Yes. I'm sure they're sad to see you go as retire. Okay. So questions. I have a couple of questions, so just bear with me here. I guess, first, just on the ATM. I guess it just sounds like the $500 million of the forward, that kind of gets you through Clearwater. And then the incremental equity is for your current -- the batteries and as you said, the $800 million base plan. Is that kind of the way to think about it?

Generally fair to say, I think, the $500 million will take us a little further than that. And then the ATM will bring us into that next phase of capital, the battery project or hopefully projects.

Right, right, right. Yes, probably $500 million plus or something if you add the last 75 megawatts. So...

If you add the last one, we should cross over $500 million for those battery projects, if we're able to close the last one.

Right, exactly. So just as far as the timing of the ATM like when it may begin, I guess, that's more of a -- because if you kind of look when you need the money, it's like $70 million, $130 million, $160 million. Is the ATM more of a '24 exercise?

It might be. We'll want to be opportunistic. The share price has increased since the Block transaction of last year. And there's opportunism plus there's risk management, right? We have known significant capital expenditures. So we want to make sure that we manage those coming expenditures wisely and as anti-dilutive way as possible. So that's the balancing act here. And we'll be able to use some debt to, if you will, bridge some of those payments. And we'll be able to dollar cost average, as you would imagine, the use of that money. So it's a great tool for us, considering the large $4 billion of capital over the next 5 years that we really have. So we talk a lot about incremental capital, but base capital over 5 years is $3 billion, right? So we are in a heavy growth phase as we look forward here.

Well, that actually leads to my next question. And -- so you have this 5% to 7% growth rate out there. Obviously, you have a tremendous amount of CapEx/rate base growth that there's obviously some [Technical Difficulty] lower the EPS growth a little bit. But this latest CapEx update, to get you firmly, I guess, within the midpoint of your 5% to 7% growth rate, if not higher, is that kind of the way to speak about it, and that's EPS growth that we're talking about?

That's right. I mean I think we had a lot of confidence in this plan. A year ago or thereabouts when we increase the growth rate, we were questioned a great deal about can you get there? And now the questions are coming, how much higher can you go? And I want to point out one thing here, which is that we need to be very careful as we prosecute this growth plan regarding customer bills. We have to be very deliberate as we execute so that we respect the customer value proposition. The rate base growth here, you might have seen in the larger investor presentation, was increased slightly. It's got a CAGR of about 8.6%. And I think we illustrated in the other slides that the procurement phases that we're in only require about a 25% win rate of these RFPs to get us squarely in the range of the 5% to 7%. So I think we're bearing out, proving out that we can get there, and we're going to pause on that growth rate guidance and execute. If we execute well, we'll reevaluate that.

Okay. But I guess the answer to my question was, yes, right?

Essentially yes.

Okay. And then the last question I have, just as you go to your walk for the first quarter and then you see like a combo of $0.26 of kind of higher power prices for no better way to put it, whether it's a higher load or the impact of higher prices, how does that kind of incorporated into the PCAM because is that all like -- because you have $0.22 of upside from sales, is that $0.26 kind of apples-to-apples when it comes to recovery or the PCAM? And then my additional question to that is, as you get -- whether it's the battery storage or other renewables coming online, whether it's contracted or whether you own it, to that take away under the volatility? And I understand you're trying to get the PCAM changed. I get that. That's -- but as far as the volatility and being so dependent on the spot market or the forward market, will that kind of -- you look at this $0.26, if you kind of have these assets operating today, would those numbers have been lower?

So it's a great question, Andy. And if you're getting at actually some of the implications of an energy system that is largely based on renewables. And so when you're at a tail conditions, prices spike, people are using more electricity than a forecaster is in our annual update tariff. And you can see that overall in the first quarter, energy cost us $13 million more than we expected. That's one of the reasons we look forward to the batteries, whether they be owned or contracted, to be able to smooth out some of these -- the volatility. The projects themselves are 4 hours in duration. And so they really will be able to keep us through the changes between different times of day and different market conditions, not necessarily adding long-term capacity that would add to, let's say, a drought year or a year, but they absolutely will have an impact, and there's no differentiation between whether we own them or not. But we -- again, we look forward to them coming online, they'll have a good impact as we move forward.

And I expect that we're below the dead band. I don't think there'll be any refunds this year. So just in terms of the operability of the PCAM, that's my outlook right now.

I guess -- yes, just real quick, just what I'm a little confused about, I guess, is because your total PCAM hit is not -- even if you're completely below that dead band on the bottom, it's not like $0.18 or $0.26. I guess I understand there's a formula in that. But some of that $0.26 is not all kind of PCAM lost earnings for the company, right?

So overall, in the first quarter, margin was largely flat. So what we picked up an additional load and mix, we lost in serving that load and mix with higher energy prices. I think, given the volatility, we've done a lot of things to improve our management through these extraordinary times. But as you saw at the end of December as well as some of the first quarter, we saw gas prices none of us ever thought we would see. So it's too early to call it for the full year. But there's no question that these additional resources will make a difference. And with every quarter, we hope to do better.

Okay. What was the PCAM negative hit in the first quarter? Did you guys quantify that?

$13 million.

$13 million of pretax?

Yes.

I'm seeing no further questions at this time. I turn the call back over to Maria Pope for any closing remarks.

Great. Thank you very much for joining us today. We appreciate your interest in Portland General Electric, and we look forward to connecting with you soon. Thank you all. Take care. Bye-bye.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all participating. You may now disconnect. Have a great day.