Portland General Electric Co

Good morning, everyone, and welcome to the Portland General Electric Company's third quarter 2021 earnings results conference call. Today is Friday, October 29th, 2021. This call is being recorded, and as such, all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, please press the pound key on your telephone keypad. If you do intend to ask a question, please avoid the use of speaker phones. For opening remarks, I'd like to turn the conference call over to Portland General Electric's Senior Director of Investor Relations, Treasury, and Risk Management, Hardan Jaramillo. Please go ahead, sir.

Thank you, Jonathan. Good morning, everyone. I'm pleased that you're able to join us today. Before we begin this morning, I'd like to remind you that we have prepared a presentation to supplement our discussion, which we'll be referencing throughout the call. The slides are available on our website at investors.portlandgeneral.com. Referring to slide two, 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 Agello, Senior Vice President of Finance, CFO, and Treasurer. Following their prepared remarks, we will open the line for your questions. Now, it's my pleasure to turn the call over to Maria.

Good morning and thank you, Jaradon, and thank you all for joining us. Hot summer weather and power market volatility had a significant impact on our region and on our results this quarter. Turning to slide four, we reported net income of $50 million or 56 cents per share for the third quarter of 2021. This compares with the loss of 17 million or 19 cents per share for the third quarter of 2020. Year-to-date financial performance is on track, and despite third-quarter volatility in the energy markets and higher O&M, we are reaffirming our 2021 earnings guidance of $2.70 to $2.85 per share. Our long-term outlook remains unchanged, and we are reaffirming our 4 to 6 percent long-term earnings growth guidance. Overall, our business is strong, driven by low growth from the technology and digital sectors, as well as elevated residential use due in part to the hot summer weather and continued COVID constraints. Year-to-date revenue is up 12% versus 2020 and for the quarter, up 17% versus last year. Jim will cover third quarter results in more detail, provide regulatory and capital updates, and discuss the outlook for the rest of the year. The ongoing impacts of climate change underscore the importance of investments and actions that we are taking to rapidly transition to a clean energy future and meet our 2030 decarbonization goals while also ensuring that we have sufficient capacity. We estimate that our 2030 targets will require approximately 1,500 to 2,000 megawatts of additional carbon-free resources and approximately 800 megawatts of not emitting capacity resources, in addition to removing coal from our portfolio. We're seeking approximately 1,000 megawatts of renewables and not emitting capacity resources as part of our RFP, which will be issued in December. As part of this procurement, we plan to add 375 to 500 megawatts of renewables to our portfolio. We will also bring on approximately 375 of non-admitting dispatchable capacity. We will work with the OPUC and parties to evaluate opportunities to procure additional resources should the types of projects submitted in the RFP process make sense for customers and are attractively priced. we could see procuring about a third of our clean energy resources needed to meet the 2030 emissions target reductions with this RFP. We not only need more renewables, we need to upgrade the grid to integrate these resources, making it easier for customers to participate in demand response and distributed energy programs, helping to keep service reliable and affordable. In our recent distributed system plan, we lay out plans for the grid of the future that supports robust two-way energy flows and better manages energy use, especially during peak periods. We estimate that as much as 25% of flexibility needed to meet our decarbonized future would come from customers and distributed energy resources, such as solar panels, batteries, electric vehicles. During the 2021 summer heat dome, we worked with customers to save 62 megawatts of power, equivalent to powering 25,000 homes. We're working to significantly grow this program to 500 megawatts by the end of 2023. We are very pleased to have been selected by the Department of Energy as part of their Connect Communities program. and are working with local DE&I groups on the placement of resources such as batteries, two-way EV charging, and solar panels to ensure that our customers and underserved communities participate in this clean energy transition. As one of the early participants in the Western energy imbalance market, we have been a leader in advocating for the expansion and strengthening of wholesale markets to increase reliability, accelerate decarbonization, and lower costs for customers. PGE and our utility partners across the West are working to bolster reliability planning, advance integrated markets, and examine the benefits of a Western regional transmission organization. Throughout these processes, we'll continue to advocate for rigorous resource adequacy standards. Sustainability is foundational to our business. In September, we published our ESG report, building upon our number one ranked voluntary renewable program. Sustainability is part of the fabric of everything we do, including financing. We recently adopted a green financing framework under which we successfully placed $150 million in green bonds. Yesterday, we filed a rate case with the Federal Energy Regulatory Commission to review our third-party transmission revenue. The revenue that we receive from these new prices will offset retail customer prices through a revenue credit. We continue to make progress on our 2022 general rate case and have reached settlements with stakeholders in October that resolves the cost of equity and gives 9.5 percent, as well as the 50-50 cash structure. We look forward to working with stakeholders on the remaining items. Finally, I'm pleased to welcome Dawn Farrell to our Board of Directors. Dawn retired as President and CEO of TransAlta in March. Her deep experience in the energy sector, as well as her leadership in transforming a thermal-based generation company to a leading clean renewable energy company will be important as we advance our own transformation. Now, I'd like to turn the call over to Jim.

Thank you, Maria, and good morning, everyone. Our third quarter results reflect the ongoing opportunity and the challenge as the economy enters a new normal. We experienced strong load growth from higher demand and hotter weather. At the same time, volatility in the power markets was evident throughout the summer. The fundamentals of our economy remain strong and are fueling strong growth in energy demand and a growing labor market with continued job growth in the region. This quarter we had strong deliveries across our customer segments with additional benefit from favorable weather. Our high tech and digital services sectors continue to grow at a rapid pace, 9% higher when compared to Q3 2020. Customers are expanding capacity and we've seen an uptick in site selection activity by data center developers and others. Residential usage remain significantly elevated as remote work continues. We anticipate these trends to continue, and this has contributed to our strong year-over-year load growth. Turning to slide five, we reported gap income of 56 cents per share in the third quarter of 21 compared to a gap loss of 19 cents per share in the third quarter of 2020. Non-GAAP income for the third quarter of 2020 is $0.90 after removing the negative impact of the energy trading losses. I'll cover our financial performance quarter over quarter on slide six. Beginning with the loss of $0.19 per share for the third quarter of 2020, we will add back the $1.09 one-time impact of the energy trading losses. We experienced a $0.37 increase in total revenues, primarily due to the strong economy driving growth in our service territory with the balance due to warmer weather. This represents a 17% year-over-year increase in total revenues. Offsetting this was a $0.39 of unfavorable power cost. We experienced substantially higher market prices due to warmer weather and increased regional demand for capacity, as well as lower renewable generation. As a result, we are forecast to be above the $30 million threshold to begin customer cost sharing pursuant to our power cost adjustment mechanism. Through the quarter, we have deferred $27 million, which represents 90% of the variance above that threshold. We anticipate the regulatory process related to this deferral will begin in 2022 after the pending rate case concludes. Our power costs this summer were not materially impacted by rising natural gas prices. Our portfolio is well positioned and a bit long to balance gas price fluctuation, and we have significant gas storage at the 4.1 billion cubic foot North Mist facility that we can draw on as needed. There was an 11 cent decrease to EPS from costs associated with our fixed operating expenses, including three cents for enhanced wildfire mitigation, four cents of additional vegetation management, including work that was delayed as we focused on storm restoration during the second quarter, two cents of service restoration costs, and two cents of miscellaneous other expenses. There was an 18 cent decrease to EPS from administrative expense. Half of the year-over-year increase is attributed to items that were unique to 2020, including $0.07 in adjustments to incentive programs following the energy trading losses in the prior period and $0.02 from the deferral of bad debt following the approval of the COVID-19 deferral. The remaining administrative expense can be attributed to $0.06 for outside services to support improvements to our customer experience, a $0.02 increase in employee benefit expenses and $0.01 from miscellaneous other expenses. While O&M was higher this quarter when compared to Q3 2020, on a year-over-year basis, our costs have increased only 2% annually since 2019. The fact that we have reduced planned outages by 29% year-over-year, set up a large wildfire prevention program, and greatly increased vegetation management is a testament to the efficiency we built into the O&M program. Managing costs consistent with inflation while increasing wildfire resiliency, improving our customer experience, and growing our digital capabilities demonstrates the effectiveness and efficiency of our workforce, as well as the use of technology. Finally, there was a $0.03 decrease to EPS from the following items. $0.03 benefit from lower depreciation and amortization due to planned retirements, $0.04 of higher tax expense due to the timing difference of asset retirements in 2020 and two cents from other unfavorable miscellaneous items. Turning to slide seven, last month we reached an agreement with stakeholders on cost of capital in our 2022 general rate case. Our agreement supports a capital structure of 50% debt, 50% equity, and a 9.5% allowed ROE. We see this as a constructive outcome and look forward to discussing remaining unsettled issues parties in the case. As you saw earlier this month, we made several regulatory filings in which we shared our plans to advance the strategy to meet our targets for reducing greenhouse emissions in the power we serve to customers. Maria discussed our RFP plans earlier in this call. We still plan to bid in benchmark resources into the RFP process. To support our bids, we filed for an affiliated interest entity that will help support our decarbonization interest. Our proposal is intended to address certain structural tax disadvantages encountered by utilities due to the unintended consequences of tax normalization requirements. The affiliate interest would provide a greater price benefit to our customers as PGE decarbonizes its generation portfolio. Turning to slide eight, which shows our updated capital forecast through 2025, we increased our capital expenditure forecast by over $100 million this quarter. This increase is concentrated in 2022 and is primarily associated with grid-based investments. With our recent settlement in the GRC, assuming approval by the OPC, this affirms that we will not need to issue equity in 2022 to meet our capital requirements, unless there is a significant renewable addition stemming from the aforementioned RFP. We continue to maintain a solid balance sheet, including strong liquidity and investment grade ratings, accompanied by a stable credit outlook. Total available liquidity at 930 is just over $1 billion. At PGE, sustainability is woven into the fabric of who we are as a company, and we stand behind that through our actions as an organization, including in our financing plans. This quarter, we renewed and increased by $150 million our revolving credit facility to include sustainability-linked performance metrics. We also refinanced the Wheat Ridge Renewable Energy Facility with low-cost debt under a green bond in alignment with our green financing framework. The demand for this was evident as it was nearly six times oversubscribed. Our investors are keen to purchase debt linked to sustainable investments. Going forward, we will seek out opportunities to tie our long-term debt toward our sustainability strategy through capital investments. Not only are these actions good for our business, but they are also good for society. Turning to slide 9, our year-to-date 2021 performance remains on track, and we reaffirm our guidance range of $2.70 to $2.85 and remain on track to achieve long-term earnings growth guidance of 4% to 6% from the 2019 base year. The picture for 2021 and beyond remains clear. Strong growth in customer demand for clean, affordable, safe, reliable, and equitable energy paves the way for us to execute on our long-term financial targets and deliver value for customers and investors alike. And now, operator, we're ready for questions.

Certainly. Ladies and gentlemen, once again, if you have a question, please press star then 1 on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Inso Kim from Goldman Sachs. Your question, please.

Thank you. my first question um is more financial in nature uh just jim for the year you know if you think about the year-to-date results um and you reiterating the uh the midpoint of the i guess the guidance range that you rate last year um seems to imply a pretty healthy fourth quarter earnings you know relatively if you look at 2019 fourth quarter or 2020 fourth quarter results please just help us you know generally piece together some of the moving parts that get put there.

Yeah, thanks, Insuv. As I understood your question, you're trying to, in effect, walk from where we are today to the result of the 2021 guidance and, in effect, what we might do in the fourth quarter. So let me try to characterize. Do I get that right? Yes, that's correct. Okay, perfect. Okay, so let's look back. to the fourth quarter of 2020. There, the earnings were $0.57 per share, you may recall, but also we recorded an asset retirement obligation for our Sullivan hydro facility, a facility that's well over 100 years old, in fact, and that was $0.17 a share. We also adjusted... incentives for that fourth quarter as non-gap earnings were picking up speed in the fourth quarter. So in reality, what happened was the way I look at the fourth quarter and I walk to the fourth quarter of this year, we had about 22 cents between the ARO and the incentive adjustment added to the 57 cents to normalize the fourth quarter of 2020, which gets you to about 79 cents. And that, in fact, gets you to about the midpoint if that were to reoccur again in 2021 of the present range. Does that help? Okay, so the ARO is a pretty big component of this. Yeah, the ARO is 17 cents a share. Incentive adjustment is 5.22. Add that to 57. You would normalize fourth quarter of 20 to 79 cents a share. And we're at 198, as you would know, for the year to date presently, right?

Right. Okay. That definitely helps. Thank you for that. Second question, Maria, just broader picture, I think, you know, it's no question that the state of Oregon has been, you know, a leader in, you know, proposing and advocating and acting on, you you know, the clean energy transformation and Portland's a big component of that. You know, when we think about the pending reconciliation package that is out there and the potential for extensions of tax credits and some changes to, you know, how those mechanisms will work, how does that, how do you think about that impacting or creating, you know, incremental opportunities, maybe even over the next five years in terms of, you know, different clean energy investments that could come about for you guys?

First of all, it's a great question, and we were very pleased to see the announcements yesterday with significant investments that will help us and others transition to a clean energy economy. The structure of the tax credits in the bill were particularly important to us. As you know, we worked with Senator Wyden on tech-neutral tax credits. Those are reflected in what was discussed yesterday by the President yesterday. And also important to us is tax normalization. That's included in, we're still working very focused on normalization for transmission and, in particular, for storage. And so those remain goals of ours. Should that not take place, the affiliate filing that Jim talked about will give us the level playing field to continue to move forward with important components from a utility standpoint for our customers around battery storage and others. so that we can get the very lowest cost for customers as we make this important transition.

Understood.

That's it for me. Thank you.

Thank you.

Thank you. Our next question comes from the line. Julien Dumoulin-Smith from Bank of America. Your question, please.

Thank you. Good morning to the team. Thank you. And congrats to Dawn as well. I don't know if she's there, but well done on bringing on more talent here. But if I could just jump into the Ray case just real quickly here, two quick clarifications. So first off, just following the earlier settlement, you know, obviously on cap structure and ROE, how do you frame the potential to settle, you know, other outstanding items and just the process therein? And then related to that, if you could clarify, you know, given the capital structure, you know, and the 50-50 authorized, Does that change any equity dynamics as far as you're concerned here?

Julian, it's Jim. Good morning. I'll kick off. So to take your last question first, yes, it does, and it gives me confidence that we could go into 2022 without the issuance of any equity dynamics. We're in very good shape from a balance sheet standpoint, our cost of financing, and able to fund even that increased capital program that I spoke of a moment ago. We changed that from $550,000 next year to $655,000. And I'll just go further, and Maria may want to add in in a moment, but we received comments earlier this week that We're evaluating those. I would say that this is a normal part of the process. I just want to remind everyone that we deferred filing a bit here earlier this year in consideration of the community impacts on COVID, so I think we were We respected everybody's interest in terms of timing. We feel we put forward a pretty modest proposal, frankly, about 3.9%. Two percent of that was in the AUT itself. It's largely a capital case. We added $993 million of capital between the last time rates were filed. We have kept, as I mentioned in the remarks a moment ago, our O&M pretty tight over that period of time. So, and as you would know, the company has a history of settling, so we are about to get into a process where we will exchange information and hopefully get to that outcome, but it's too soon to predict anything at all. Maria, anything to add?

No, you know, I want to emphasize that as we've made decisions around our rate case, we have been particularly cognizant of the economy and and particularly on those most impacted by the pandemic. And we, as a result, delayed filing our rate case. I would also say that we were able to do that because of all of the tremendous work that our colleagues here at Portland General have done. In Jim's prepared remarks, he talked about the efficiencies that we have gotten from better use of technology, digital, driving efficiencies across our entire company. As a matter of fact, our planned outages are down significantly, over 20%. We have seen better utilization of our assets, better work management flow, and there's no question that we are getting more work done than we have in the past. And I'm really encouraged that we were able to keep, through all of the ups and downs, of the last 18 months to two years, O&M increasing at only 2% annually. And this focus on cost, but more importantly on efficiency and driving outcomes for customers has allowed us to have the flexibility to delay our rate cases. We brought on really important reliability capital, capital also in the compliance area. As Jim mentioned, we have really focused on vegetation management, wildfire protection. And as you know, people are moving to Oregon, and we have quite the expansion in our digital and high-tech areas. And so we have built a number of new substations. We've expanded some other of our infrastructure. And it's really because of the good work of people at Portland General that we've been able to keep our prices as low as we are, particularly in light of all that's going on in our economy today.

Got it. Excellent. And just if I can pivot here to the affiliate dynamic just real quickly. You brought this up. This seems somewhat novel. Can you speak a little bit more as to just how that might expand the opportunity or why pivot to this opportunity now given that you haven't used it in the past? I understand that tax normalization, you know, obviously has been an impediment out there and then maybe your level of confidence there and now that you're pivoting to this opportunity. strategic focus here on winning?

Sure. So, first of all, we remain hopeful, and the industry is focused on resolving the tax normalization issues, and those discussions is You've seen Senator Wyden quoted in political and whatnot are very much in play. Affiliate filing is not new. We've been talking about it for a long time and debating it. So it's very similar to many other affiliate filings that you see across the country. It will allow us to utilize tax advantages to reduce renewable costs for customers, to allow for more competition, and really so that our customers can have the very lowest cost energy possible. that's reliable as we transition to ever-increasing amounts of new renewables. We, as well as many others, have very aggressive 2030 and 2040 goals, and we think this is an important tool in that toolbox.

Julian, I think I hear you asking the question, why now? And why us? And in addition to the structural disadvantages, compared to the way independent power producers can accelerate those tax credits and we have to normalize them over the life of the asset, 30 years, let's say, we're about to enter and pivot into a very significant growth plan in renewables. We want to be an extremely active benchmark and owner of those assets, and we need to level the playing field and have the tools to do that. We need a couple of thousand megawatts between now and the end of the decade, and we want to be in that mix. Don't expect to win everything, but we expect to be very competitive, and we need the tools to do that. And that's really the framework and why now we're doing that.

Fair enough. Excellent. I will leave it there, guys. Thank you. Sure.

Thank you, Julian. Thank you. Our next question comes from the line of David Peters from Wolf Research. Your question, please.

Hey, good morning, guys.

Morning.

The first question I just have is just on the net variable power costs. Obviously, the magnitude of that seems fairly unprecedented. And then the deferral of $27 million, just curious how you expect this to play out exactly, just because I think this is the first time you expect to kind of breach that. And then just kind of, particularly with the backdrop that you have several other kind of sizable deferrals pending, that are outstanding along with the rate case. So are there any creative ways to kind of mitigate potential bill impacts for customers here going forward?

Dave, I would agree with your observations. My time here is fairly short, but I look back and I think you're right about the nature of the levels here. But so is the weather and the markets that we experienced over the summertime. So I look at the mechanism itself and our deferral under that mechanism is highly formulaic. There are deferrals. and there are deferrals. This one, I believe, can be objectively calculated at the level that we have recorded it. And so I believe that this particular deferral is very straightforward, very verifiable. And the way it would work, typically, I would say, but subject to discussion with the OPUC is, We would amortize that over a couple-of-year period, starting, as I mentioned in the remarks, after we adjudicate this pending GRC that we have at the moment. So that's that one. And you referred to the other deferrals, which are substantial. As you could calculate, they're nearly $150 million altogether, but they're very different in nature. You know, there's the COVID deferral, which, again, is subject to, I think, a pretty straightforward calculation around debt, bad debt. And then there are the more complex deferrals around the wildfires of 2020. and the last one being the biggest of all, which is the February storm costs. So I think I described these in terms of both size and ascending complexity. And I fully expect, since we don't have a securitization capability in this state, at least not yet, we will have to sit down and – agree on an amortization schedule. And as I describe those deferrals, they will go from shorter to probably a longer period of time. So the latter deferrals that I mentioned probably over a number of years, maybe many years. So that's how I look at it, Dave, and that's how I would think about it going forward.

Dave, let me add a couple things to that. We have gone through an extraordinary period of time. We obviously had the pandemic We had very destructive wildfires. We had a once-in-40-year ice storm where more than half of our customers were out of power, and we had over 700,000 distinct customer outages. We also had the high-heat dome events, and it really has been an unusual point in time. Most utilities would use a securitization system, And that, I think, is something that we will explore with parties. It's very important as well because we're able to take advantage of very low-cost debt rates. And so that will certainly be something that we will pursue. I think it's really important as we look going forward around power costs that the PCAM is really just one link in the chain of power cost recovery. You know, I think of this as kind of a four or five- step process. The first one is our forecasting methodology. And earlier this year, late last year, we made changes to some of our modeling assumptions with discussions with parties and the OPUC. And those changes allow for more volatility to be reflected in our modeling. And that's particularly important with the variability of hydro and wind. The second would be our AUT or our power cost filing that we do each year. We're able to true up market prices for power as we go into the prompt year. And then third, really our procurement strategy and de-risking through our power operations. And they have done an excellent job at that. And I'd say they're working very closely, this would be my fourth area, in terms of plant operations. and making sure that our plants have the utmost reliability on the most challenging days of the year, whether those be ice storms and freezing temperatures or high heat events. And then finally, the pecan comes in and provides a regulatory backstop for our extraordinary volatility as we've experienced this summer. So I think these are really unusual times. As we look forward into 2022, And you can see we have been in discussions with parties around the AUT. We're about to, you know, we'll be locking down those numbers as we move forward. But about half of the $60 million increase that we're roughly forecasting is directly related to higher load. And so that's a good variance. And we couldn't be more pleased with the expansion that we're seeing in the industrial commercial sector, as well as with customer growth as people are still moving into our service territory into Oregon. And then we're seeing about the other half related to either de-risking the portfolio with capacity and making sure that we have adequate reserves going into the year. and then also just higher prices that are reflected. One of the things that I'm really pleased is that our hedging strategy with regards to natural gas, which has been in place for almost a decade, and is really meaning that our customers are not experiencing the volatility of natural gas prices. And so it's nice to see when these practices make a bottom-line difference to every bill we send out to our customers. and we're able to insulate them from some of the volatility that we're seeing across markets in the energy space.

Great. No, thank you for that detail. Second question I had, just back to the rate case, you know, we saw staff's testimony earlier this week, and obviously a big delta versus your guys' ask, which I don't think is inconsistent with history, but could you maybe just comment on what you saw in there you know, understanding that you think there's still a good chance of settlement, and then just chances on getting some of those proposed changes approved around the storm accrual and decoupling.

Yeah, Dave, I'll start. Maria may want to add to it. You're right. I mean, I appreciate your comment, not inconsistent with history. We don't overreact to these things either. You know, these are the kinds of things that – happen in cases like this. I will tell you that I think we should pursue the GRC in all of its detail. We desire to get to a settlement, but the deferrals are on separate tracks and separate dockets. and therefore should be separated from the case. And that's our view, and that's the way it's set up to go forward here. And as you know, the settlement prospects here are always something that we try to do, and we will deal with the deferrals in due course, but they'll be on a separate track.

I don't think I have anything to add. We'll work collaboratively with parties. We'll be transparent. And I think help everyone understand the magnitude of the past year to 18 months and the good work that we have done to address the issues that Mother Nature has brought us and to create a more reliable and resilient utility as we go forward.

All right. Thank you, guys.

Thank you.

Thank you.

Thank you. Our next question comes from a line of Shar Paritha from Guggenheim Partners. Your question, please. Hey, good morning, guys.

Morning, Shar. Maybe just starting at a higher level, you guys obviously laid out some pretty substantial, you know, energy and capacity needs through 2030. And I understand it won't necessarily all be utility-owned, as, you know, Maria, you know, obviously you highlighted in the prepared remarks. But how should we sort of think about maybe this opportunity in the context of your guided 4% to 6% growth? You know, in the past, you know, we've talked about the current RFP pushing you higher in that range. So would the size of the overall need be enough to get you to consider maybe guiding even higher?

Sure. It's Jim. Good morning. So I will tell you our setup for the guidance range here is not including, you know, any – any generation facilities that we may be fortunate enough to compete and win for in this next round. In fact, I would anticipate a couple of IRPs in this decade, maybe two or three, and successive calls for more resources. We've recently upped our expectations, and we've been encouraged to up our expectations given the march that we're on here. So just to make it clear, none of that, ownership would be in the 4% to 6%. And also, you know, let's not forget here we're backing out, as soon as practicable, our interest in the coal strip plant, right? And we have accelerated depreciation that's been agreed to. It still needs to be approved finally by the Argonne PUC in the context of this rate case, but we have a settlement there to accelerate depreciation in 2025. So we're making a really strong pivot to a significant purchase and perhaps ownership program. But in terms of ownership, that's not in the guidance, nor is the capital that we've laid out that, you know, to operate the system, including any of the capital that we would need to build those assets.

So just maybe just brings a follow-up. So is the current process, is that supportive of how you guide, as in extending the runway, or could it actually be accretive?

If I understand your question correctly, any additional, as Jim mentioned, any additional ownership opportunities through the IRP, should those be the least cost, least risk projects, would be accretive to our 4% to 6% growth.

Yes, for sure. And you can expect, Char, that we will capitalize those appropriately, but at the end of the day, we'll be accretive, sure. Okay. Okay. Thank you very much for that.

And then just on the RFP process, right, in the event – you were successful, when would you be looking to do associated equity? Would you automatically be eligible for an associate rider for recovery, or would you have to go back in front of the GRC?

So we do have a renewable adjustment mechanism that allows us to track in renewable energy. So that's very favorable, and it's a mechanism that we've used on numerous occasions, and most recently with the Ridge Energy Facility.

And I'll add, Char, that we wouldn't know about the award periods until probably the spring and early summer. Construction would take place, design and construction would take place later that year into 23 and 24. So financing would happen in that timeframe. We have such a terrific liquidity position that we could leg into any ownership without immediately needing to go into the market for much in the way of financing, certainly equity financing.

Okay, perfect. That's all the questions I had. Thank you very much.

Appreciate it. Sure. Thank you. Thank you. Our next question comes from Peter Burton from Mizzou. Your question, please.

Hi, thanks for taking my question. Just to follow up on the power cost side of things, is there any more color you can give on what drove the volatility that you saw this quarter? And then secondly, what gives you comfort that that volatility is not, I guess, the new normal going forward? Thank you.

Sure. Well, in the West, and maybe even the rest of the country, as you look at scorched trees all over the place, you know, I think it's really important that we recognize the high heat events that we had. And so that created, you know, we're able to forecast those events, but, you know, not too far out into the future. We also had quite a bit less hydropower in the region, and aligned with hydropower is actually wind generation as well. And that created quite a bit of volatility in market prices throughout the West and those that we were exposed to. I would say that we particularly saw run-ups before the day ahead markets would have some of the highest prices, and then they frequently would fall off in real time. As we think about working across the West, we've seen additional liquidity as we're more integrated, and I would say power and energy trading leaders are really looking at how we expand the integration and pooling of resources across the entire West, whether that's through deadhead markets and the expansion of the EIM with CAISO, whether that is through reliability discussions at the Northwest Power Pool, or whether that's through other forums where people are really looking at how we manage going forward. We're fortunate to have, as I walk through, the ability to update our power costs. and every year through the annual update mechanism. So we were able to reflect the learnings year to year into our future power costs and the reality of these market conditions. As you know, we've, across the West, have reduced a number of significant thermal plants, and that's having an impact on, as we get into scarce periods of time, there are less resources in standby that could come back onto the market. And as a result, I think we will continue to see volatility, and we are learning and managing through it.

Okay. Thank you. Thank you. Our next question comes from the line of Travis Miller from Morningstar. Your question, please.

Good morning. Thank you. You answered a lot of my questions in detail. I appreciate that. I want to go back to the CapEx increase. Can you talk a little bit more about that? What types of projects led you to increase that 2022 number, and what was the factor or factors during the quarter in the last three months that led you to raise that $100 million or so?

So let me build a little bit, Travis, on the answer I just gave to the prior question around reliability in markets. One of the things that's also really important as a tool in our toolbox, and I mentioned it in my prepared remarks, was that being able to use essentially 25% of the capacity and sort of shock absorber of markets in the distribution systems. And so as we move forward, we have accelerated our plans around our distributed resource plans, whether that's DERs, it could be solar, battery storage, electric vehicles and their ability to charge and create a buffer, but also demand response programs. We have had one of the most robust energy conservation programs in the country. In fact, we lead in those areas. And so all of this together combined with the infrastructure that needs to support a really smart, flexible grid as we integrate more renewables and try and reduce the impact of volatility is important. It's not just important to pricing. It's important to overall reliability. I'll let Jim talk to you a little bit more about the specific buckets of capital that we have. But You know, please know that we are moving quickly to reflect the new realities of our markets and the need for greater sustainability and a carbon-free future.

Hey, Travis, I'll add that largely we don't think of CapEx as something that is temporal. You know, in the short term, we think of it, you know, as a long-term matter. So just looking at... The 22, the reference to the higher CapEx at 655 versus 550. So largely that's 65%, in fact, grid-related, just to prove the point that Maria was making. About $25 million of that really is from our integrated operations center, which we're finishing up. We're adding some facilities out there. That's about a $200-plus million investment. A little bit of that carries over into the new year, 2022. We've got some work on the generation side, as you would imagine, as everyone would have maintenance capex there. And then we're investing a great deal in technology. That's the other chunk or part of that digitization, more customer service activities there. improved work flow and how we manage massive amounts of data that we're collecting. Some of our systems are older, need to be replaced, operating systems, administrative systems, and what have you. And then, as you look to the out years, 2023 to 2025, again, those exclude, as does anything in 22, regeneration that we may build. It's largely grid-related work. You could really see the technology investments continuing, the $85 million, but then it's close to $400 million in all of the topics that Maria just mentioned. So it's really about grid and resiliency, other than any generation, which is not included here.

Okay, great. That's helpful. One higher-level question. Obviously, you've talked about a lot of capacity needs relative to energy needs. How do you think about capacity in an 80% carbon reduction world or even a 100% clean energy world these days? We typically think about capacity as a fossil fuel source type of resource.

How do you think about that? We start out blessed to be in the Pacific Northwest where overall hydro generation makes up about 50, 55% of the generation in the region. So I think it's important to acknowledge that we have a natural competitive advantage from that standpoint. And much of that in addition is low cost. We also do have capacity factor from both wind and solar and the diversity of being able to use those combined and then adding battery storage. And our Wheat Ridge facility is a great example of not only that since it combines all three of those technologies in its scale, but it also better utilizes a very scarce resource of transmission. So that's important. I would also say I've mentioned about being able to use the distribution system as a shock absorber and really a source of capacity across our area. And that will grow very rapidly and is a really important component for us I would also say that we have a number of partnerships. We've announced a partnership with Douglas PUD, one of the hydro operators on the mid-sea. We provide energy services. They provide capacity to us. And you can see a renewal of a contract we have with the Confederated Tribes of the Warm Springs, you know, along those same lines on the Deschutes River, as well as many others. We take what I would call an all-in-above set of solutions, including all of the integrated aspects of west-wide markets and the need to move much faster and accelerate the pace of change across the entire West. So it's an exciting time. These are challenging problems. I don't want to underestimate or sound as if we have all the answers. We're going to be learning and growing through this with every year, and it really is going to be the challenge of the next decade around reliable sources of capacity that supports ever-increasing uses of electricity. And we're excited to be leading in this clean energy future.

Yeah, Travis, I'll just wind up here by saying that in the 2021 RFP that we're talking about launching here in the near term, About 375 megawatts of non-emitting capacity is being called for, and I'm going to be very interested to see how battery technology and the cost curves show up in terms of that auction. I can't prejudge it right now, but that's a pretty big purchase for a system of this size, so we'll see where that goes. And it may not only be batteries, but the sense we have from the market is that they will show up And, of course, pricing will be very, very important.

Yeah, indeed. Thank you very much. That's very helpful. Appreciate it.

Thank you.

Thank you. Our next question comes from the line of Andrew Levy from HeightEdge. Your question, please. Hey, guys.

How are you? Hey, Andy. Hey, Andy. A couple questions. First on... I'm kind of what's going on in Congress in direct pay. I see you guys are kind of familiar with that and looked at that. Is that correct? Yes. Okay, before I ask my question. So how does that kind of play in? So, you know, assuming you win a portion of this capacity that's needed, I guess, you know, that's both good for you guys for the ratepayers you know it brings in more cash immediately it maybe affects rate base a little bit as well um but if if what you're saying is you know a situation where you may need to issue some equity eventually to pay for you know these capacity additions how would that kind of offset that equity need and maybe change you know your outlook as far as growth and then additionally I would think it would also make you more competitive as a bidder for these assets too by being able to use something like that in your calculations.

So, Andy, first of all, thank you for the question. And you're absolutely right. Our ability to deploy all of the tools that we have, whether it be tax equity, whether it be through PTCs, ITCs, direct pay, grants from Department of Energy. As I mentioned, we received a grant for some projects in our distribution system targeting low-income areas. All of these things are incredibly important tools as we deliver cost-effective, renewable, and reliable energy to our customers. What we call it here is leveling the playing field, but it's really important that customers do not see price shocks and that we're able to use all of these tools competitively and effectively for our service territory, the state of Oregon, and all the customers that we serve. There's no question that direct pay would offset needs for equity and give us more optionality as we move forward, as would many other aspects in the reconciliation plan, as well as all of the tax issues still being worked out.

I'm a fan of the direct pay PTC, Andy, because, well, I think it's probably pretty obvious, but it's a significant gain for our customers, a significant gain for the company. The thing that I would add to Maria's explanation is that this could help us eliminate some of the unutilized credits that we have carrying forward, right? So you'd have more efficiency in that regard as well. So the cash benefits, the cash flow, the lack or the lessened equity requirements are all benefits and I hope we get that, just to be honest.

Okay. And then kind of continuing on, then you have this like regulatory, you know, structural regulatory lag that's a fairly fixed cost, if I'm not mistaken. It doesn't really grow a lot as far as the actual cost of the lag. So as your rate base grows, by definition, that lag, especially if you end up adding significant capacity in CapEx, that lag theoretically should shrink, shouldn't it?

Yes, absolutely right. And yet another reason why we're benefiting from the growth in our territory, that sort of growth should benefit us in a number of ways, including that lag, right? As you know, I mean, the OPC, OPUC calculates our equity returns differently than we would from an accounting standpoint. We punch over 9 percent on an accounting standpoint, so we do relatively well, I think, with investors. In terms of the allowed ROE, of course, they take out the short-term debt here. So we actually have a bit higher ratio on equity as calculated by OPUC standards than we would on an accounting basis. But our returns are better on an accounting basis there. But you're right. It's the concept of spreading those expenses over a larger base. That's fundamentally right.

It also reduces the volatility as you have a larger, more stable base to start with.

Got it. And one last question. So this is kind of circling back to the beginning. So just on the PCAM, so, you know, your strategy as far as kind of eliminating That risk for both the shareholder and for the rate payer, you know, is by adding this capacity over time. And whether it's, you know, whether you own it or you contract for it, you know, that obviously will help on the volatility, especially if we get extreme weather. But I'm just curious, just for 2023, 2022, excuse me, I'm jumping ahead. And every, every year matters to me as I get older. So I should, I should pick my time here, but I guess for all of us, but, um, for 2022, again, without divulging, you know, anything that, you know, you may not want to divulge as far as, you know, how you're gonna, you know, uh, go into the market. Um, what, what's kind of the strategy as far as trying to eliminate, you know, if we got extreme weather again. We don't know what the weather's going to be, but to try to eliminate some of that volatility into next year for both you, the shareholder, and the companies.

Yeah, so first of all, you know, we take what I call sort of an all-and-above set of strategies, and really it starts with how we run our generation facilities and ensuring that they are 100% reliable during the most challenging days of the year. The next is how we integrate those generation facilities across our power operations area and ensuring that we have the right amount of capacity procured and the right reserve margins for the increased volatility that we are seeing as we move forward. and clearly all of those things we've taken actions on. We also have adjusted and worked with parties in the commission our modeling techniques to make sure that our modeling is reflecting the current market reality of having less, quite frankly, thermal resources that can just be turned on and off. And so those things are really important. As we look farther out, better integration of of renewables into our distribution system. And so we have accelerated starting now and through 2022 and 2023 our distributed resource plan. And that's really important to be able to use the distribution system essentially as a circuit breaker and a source of generation. And we found that this was particularly helpful during the high heat dome events where we were able to move around some of our distributed resources in the system, as well as manage transformer outages and others and really measure reliability at that time. And then finally, working with all of our utilities across the West, to ensure that we're working on day-ahead markets, we're working on further integration, and other areas around reliability. And then finally, looking at all the way down to assessing RTOs and other mechanisms that will help us move forward. So we're taking a layered approach, starting with ourselves and corrective actions we can do, things that we can do that are new and different using technology, and then things that we can deal with through partnerships and others. So I hope that this is really important work, and it is unique work of a regulated utility, and we're fortunate to be vertically integrated and to be able to serve our customers. There's no question that our customers want ever-increasing amounts of clean energy, but they're not going to trade off costs and reliability.

And we learned a lot this summer from the extreme conditions that we found ourselves in. Our system... work very well, generation as well as the T&D system. Very limited impacts on the customer. So I think we were battle tested in that regard. But at the same time, those more extreme conditions, I think someone said it earlier on the call, are those the new normal or not? And we don't know. And I won't say much more than this. We've already prepared very well for next summer in terms of our positioning. And I think we're going to be extremely well prepared as we go into the season next year.

That's terrific. And yeah, I mean, the main thing is, you know, you kept the lights on, which is the most important thing.

Yeah, I was very proud. I was very proud of the group, both on the generation side and the T&D side, under extreme, very extreme conditions.

And each point in time, whether it be fires or ice storms or heat zones or whatnot, We are rapidly iterating and learning faster than we ever have before. AI.

Okay. Thank you very much. I know. I know. I get it. I've taken enough time, and it's like 12.05, and people probably want to go have lunch. But I'll see you guys down in Florida. It would be nice to see you in person, and we don't have to worry about the mute button. So that will all be good.

See you soon. Thank you. Our next question comes from the line. Brian Russell from SIDOTI. Your question, please.

Yeah, hi. Just curious, when you set the AUT and the net variable power costs, do you assume normal hydro condition or do you utilize a forecast when setting that? And when is the actual date in which the AUT is set?

So we use a long-standing hydro forecast, and sometimes we're a little bit above them, sometimes we're below them. Those hydro forecasts go back decades. And believe it or not, but in the early part of the 30s and 40s, and I have to go back and look at the exact dates, we had tremendous droughts across the West. So that data is actually reflected in the hydro forecast as well. And then for the... Wind forecast, which is just as important, we use five-year rolling averages, and we've had pretty tough wind conditions as well, so that's reflected in the history that's used. All of that data also goes into how the market is pricing both electricity and gas, and those prices are trued up, and we will, in the next couple days and weeks, we will be setting the AUT, and then that will be what we'll use for 2022. combined with the new modeling that we've worked together on with the parties.

Right, because I know that the forecasts are for wet and cold weather in the Pacific Northwest, and I was wondering if that's captured in the tariff. or, you know, if that creates, you know, the benefit that you potentially retain under the PCAM.

So the current weather conditions or the current forecast is not necessarily used in how we are setting. It goes into the calculations of the longer term or, in the case of wind, five-year averages. And I can tell you, if we are expecting a full year of – wet and cold weather, we're off to a good start in that instance and that will be very helpful for hydro conditions as well as restocking not only reservoirs but also in some instances the water table. So all of that is good and will be a benefit this next year. I would also note that with those wet and cold temperatures also comes a lot of wind that not only helps with energy generation but can create additional outages and so that sometimes is a negative hit to our T&D costs. So we can see weather go both ways. And we are – it's one of the reasons that we're hardening our system so that we can reduce outages, especially as people continue to work at home and kids are sometimes going to school still at home, making sure that our reliability is higher than ever.

Understood. And then just real quickly on EV infrastructure, you know, is that – a sizable investment opportunity in addition, you know, to owning, building or owning more supply for your portfolio?

Sure. So first of all, from a legislative enabling standpoint, we've got great decisions on the books in support of utility infrastructure to accelerate the pace of electric vehicle adoption. whether it is infrastructure that's needed within our systems, transformers, substations, lines, whether it is make-ready, so the additional cabling and infrastructure to get to the charging stations, or whether it's the charging stations themselves. It's very clear that the state of Oregon and the commission expect the Portland General to be a leader and an enabler in clean transportation. And so we see it as a tremendous opportunity. It'll obviously smaller skies now, but will increase substantially with each year. And the forecasts for electric vehicles are very high. And Oregon has some of the highest penetration, highest amounts of electric vehicles already to start with. But the other is, is that The more electric vehicles there are, the more sort of off-peak period of charging we can do, which enhances reliability, lowers costs for customers overall. And so we see it as really a synergistic sort of goodness for the entire system as we move forward. Not only is it a cleaner environment, better reliability, but also we're able to lower costs as electricity, as the fuel is less expensive than fossil fuels.

Ryan, it'll show up in load growth, I would say, tending in the second half of the decade here, but starting to ascend in the next couple of years, in addition to the CapEx implication. So I think there's goodness on both sides. There'll be additional CapEx to support, as Maria said, but also I would estimate more and more load growth coming out of that as we get to the second half of the decade.

We see each electric vehicle essentially equivalent to a new residential customer.

Okay, great. Thank you very much.

Thank you. Our final question for today comes from the line of Paul Patterson from Glenrock Associates. Your question, please.

Hey, how are you guys doing? Good, Paul. How have you been? All right. It's been a while since I've talked to you, Jim. Yes. So listen, so much of my questions have been answered. Just, you know, I really appreciate your comments, Maria, about your focus on customer costs, et cetera. And I was just a little surprised, and maybe you can sort of explain, if you can, the disconnect in the staff testimony, which seems to highlight right up front that they're concerned that there is some sort of tradeoff between this and and an environmental focus, at least that they seem to be somewhat concerned about that. And I'm just wondering if you could sort of explain where you think they might be coming from, or if this is a communications issue, or what do you think? Because I know you guys are just the opposite, or at least that's my impression.

So first of all, you know, I don't think I'm going to take a stab at where staff's coming from. I would reiterate all the comments that Jim has made, that we work collaboratively together. They're the regulators. We're the regulated. We as a company are really proud of the investments we have made. I believe we got it right in terms of seeing the future and the increased volatility, the pressure on reliability. And we have been investing to be able to weather the storms that come at us, whether it's high heat or ice or whatnot, and to be able to deliver affordable, reliable energy to our customers that is increasingly carbon-free. And if you look at the overall price increases that we have proposed, they're quite modest, and it really hats off to everyone who works at Portland General day in and day out at driving efficiency across our system. better use of technology on digital solutions, putting the customer first in everything that we do. And I'm really proud that we were able to keep our customer prices as low as we've proposed in the general rate case, and that we were able to hold off on our rate case during the worst days of the pandemic. So I think there's a lot of goodness between our filing, and we look forward to working collaboratively with parties as we move forward.

Sure, but sort of outside the context of the rate case itself and the back and forth and what have you on that, when you guys are forward thinking and you're looking at all this, are there ways perhaps of using technology and renewables to actually lower costs for customers? Do you see any of these things as perhaps being from a cost reduction perspective perhaps? uh... in terms of delivering this or i mean in other words it seemed to me from reading it that they thought that there was some sort of trade-off at least in terms of focus and that's what i was sort of that's what they're destroying strategically speaking it's just in general how should we think of that when you're when you're looking at all this or is it just look if we're going to be we're going to be going green we're going to have to pay a lot more for it if all i'm saying so

No, I don't believe we're going to have to pay a lot more for it, but I do think we're going to need to be smarter. We're going to need to use technology in different ways. We're going to need to be integrated with partners, not only in our distribution system, many of whom are our customers, but also across the West. And you can see that continually through the work that we have done to keep our costs low. Renewable energy today – new renewable energy in most instances costs less than new thermal operations, but it's going to create additional challenges around technology. I'm really pleased that we've gotten after our distributed resource systems. We have an ADMS system that's just about to go live. and we will continue focusing in on the technologies that will allow us to reduce costs for customers and the renewable energy that we are taking on. This is a huge transition, and we're all learning together, and we're going to be transparent and collaborative.

Okay. Thanks so much. I appreciate it. Thank you. Have a great one. Take care.

Thanks, Paul.

Take care.

Thank you very much.

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 all for joining us today. And for those of us that we will see at the EEI Financial Conference in just a couple of weeks or 10 days, we appreciate your interest in Portland General, and we hope to connect with you in the future. Thank you.

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