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Edited Transcript of POR earnings conference call or presentation 28-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Portland General Electric Co Earnings Call

PORTLAND May 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Portland General Electric Co earnings conference call or presentation Friday, April 28, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Liddle

* James F. Lobdell

Portland General Electric Company - CFO, SVP of Finance and Treasurer

* James J. Piro

Portland General Electric Company - CEO, President and Director

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Conference Call Participants

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* Andrew Levi

* Brian J. Russo

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research

* Julien Patrick Dumoulin-Smith

UBS Investment Bank, Research Division - Executive Director of Equity Research for Electric Utilities, Alternate Energy, and IPPs Group and Analyst

* Paul Thomas Ridzon

KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst

* Siddharth Verma

Goldman Sachs Group Inc., Research Division - Research Analyst

* Travis Miller

Morningstar Inc., Research Division - Director of Utilities Research and Strategist

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to the Portland General Electric Company's First Quarter 2017 Earnings Results Conference Call. Today is Friday, April 28, 2017. This call is being recorded. (Operator Instructions)

For opening remarks, I will turn the conference over to Portland General Electric's Manager of Investor Relations and Corporate Finance, Chris Liddle. Please go ahead.

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Christopher Liddle, [2]

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Thank you, Amanda. Good morning, everyone. I am pleased that you're able to join us today. Before we begin our discussion 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 2, I'd like to make our customary statements regarding Portland General Electric's written and oral disclosures. There will be statements in this call that are not based on historical facts, and as such, constitute forward-looking statements under current law. These statements are subject to factors that may cause actual results to differ materially from forward-looking statements made today.

For a description of some of the factors that may occur that could cause such differences, the company requests that you read our most recent Form 10-K and Form 10-Q. Portland General Electric's first quarter earnings were released via our earnings release press release and Form 10-Q before the market opened today, both of which are available at investors.portlandgeneral.com.

The company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. This safe harbor statement should be incorporated as part of any transcript of this call.

Leading our discussion today are: Jim Piro, President and CEO; and Jim Lobdell, Senior Vice President of Finance, CFO and Treasurer. Following their prepared remarks, we will open the lines for your questions.

Now it's my pleasure to turn the call over to Jim Piro.

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James J. Piro, Portland General Electric Company - CEO, President and Director [3]

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Thank you, Chris. Good morning, everyone, and thank you for joining us. Welcome to Portland General Electric's first quarter earnings call. On today's call, I'll provide an update on our financial and operating performance, the economy in our operating area, our capital expenditure forecast through 2021, an update on our Carty Generating Station litigations, our 2016 integrated resource plan. And finally, the status of our 2018 General Rate Case. Then I'll turn the call over to Jim Lobdell, who will provide more details on our financial performance and guidance.

As presented on Slide 4, we reported net income of $73 million or $0.82 per diluted share in the first quarter of 2017 compared with net income of $61 million or $0.68 per diluted share in the first quarter of 2016.

Higher net income was primarily related to increased energy deliveries in our service area resulting from one of the coldest winter seasons we've seen since 1979. Additionally, we have strong industrial demand from the high-tech sector, offset by storm damage and lower wind generation.

On Wednesday, the PGE Board approved our 11th consecutive annual dividend increase since we went public. The 6% or $0.08 per share annual increase reflects our commitment to providing a competitive return for investors, and it is driven by the company's ability to execute our long-term strategic plan of operational excellence, business growth and corporate responsibility.

Moving to Slide 5. I'm pleased to report the company's strong operational performance during a quarter of historic snow, ice and rain. It is a testament to our employees' commitment to delivering safe and reliable service to our customers regardless of the elements we face.

In addition, during the quarter, our generating plants achieved a 95% availability. I'm also proud to share that PGE continues to be ranked in the top quartile for customer satisfaction for residential, business and key customers according to Market Strategies International and TQS Research.

Additionally, we were again named a 2017 environmental champion by our customers, according to a nationwide survey of utility customers conducted by Market Strategies International.

Now let's move to Slide 6 for an update on the economy and our customers. We continue to see positive economic trends in our service area, including unemployment that's the lowest on record in Oregon, wages that are rising at a healthy pace and a year-over-year 12% increase in building permits. The Oregon Office of Economic Analysis is forecasting continued gains in the Oregon economy in 2017, including job growth of 2.4%, and reaching more than 21,000 housing starts.

In March, unemployment in our service area was 3.3%, which beats Oregon at 3.8% percent and the U.S. at 4.5%. These low levels have not been experienced since prerecession and indicate an economy near full employment.

The continued strength of Oregon's economy contribute to an increase in PGE's total customer count of approximately 1.1% compared to the first quarter of 2016. While we experienced strong residential and industrial energy deliveries in the first quarter of 2017, we continue to expect weather-adjusted energy deliveries in 2017 to decrease between 0 and 1%. This is based on expected decreases in delivery to metal manufacturing customers and ongoing energy efficiency efforts lowering the residential and commercial low growth rates.

Looking forward, we continue to forecast long-term positive annual energy delivery growth of approximately 1% based on the strength of our local economy. In particular, we're forecasting growth in the high-tech sector and a continuation of strong in-migration.

On Slide 7, we have provided a summary of the company's current capital expenditure forecast from 2017 through 2021. These expenditures are related to investments we're making to maintain and build a more resilient grid. Our investments include upgrading and replacing aging generation, transmission and distribution infrastructure, strengthening and safeguarding the power grid to better prepare for storms, earthquakes, cyberattacks and other potential threats, and implementing new customer information systems and technology tools to ensure employees can continue to provide prompt, effective service to our customers. We have not included any capital expenditures related to potential projects pursuant to our 2016 integrated resource plan. We have also not included future capital expenditures for system resilience.

Moving to Slide 8, we have provided an update on the Carty Generating Station, our 440-megawatt natural gas baseload resource near Boardman, Oregon, that went into service on July 29, 2016. As of March 31, we had $636 million, including AFDC, of capital cost for the project. Our estimate for the final capital expenditures for Carty remain at approximately $640 million.

As previously reported, we are pursuing legal actions against Liberty Mutual and Zürich North America, the 2 sureties who provided a performance bond in connection with the Carty construction agreement.

At the end of July 2016, the U.S. District Court of Oregon ruled against the sureties' motion to stay the proceedings filed by PGE in U.S. District Court of Oregon and ruled in favor of PGE's motion to enjoin the sureties from participating in an International Chamber of Commerce arbitration proceeding initiated by Abengoa, related to the parental guarantee provided by Abengoa in connection with the Carty construction agreement. The sureties appealed the District Court's ruling to the 9th Circuit Court and on December 13, the 9th circuit issued an order staying the district court proceeding, pending a decision on the appeal. The oral argument regarding the appeal is scheduled for May 8 at the 9th Circuit Court and we anticipate a decision will follow several months later. For more detail, you can refer to our 10-Q.

Slide 9 provides an overview of the timeline and action plan for our 2016 integrated resource plan that we filed with the OPUC in November 2016. The action plan calls for a minimum of 135 average megawatts of cost-effective energy efficiency and 77 megawatts of demand response across the 4-year planning period. Additionally, the action plan calls for 175 average megawatts of qualifying renewable resources.

Our initial IRP decision -- our initial IRP submission also identified the need for us to acquire up to 850 megawatts of capacity, which included 375 to 550 megawatts of long-term dispatchable resources and up to 400 megawatts of annual capacity resources. Since our filing, the 2021 capacity need in the IRP has been reduced from 819 megawatts to 561 megawatts. This is due to 3 key developments: one, our December 2016 low forecast update reduced the capacity need by 71 megawatts; two, on March 29, 2017, we executed a 10-year power purchase agreement with Douglas County PUD, renewing our contract for a portion of the output of the Wells Hydroelectric Project beginning September 1, 2018. This contract reduced our capacity need by 135 megawatts; and three, additional contracts that we're executed with perfect qualifying facilities between June 1, 2016, and December 31, 2016 that reduced our capacity needed by 52 megawatts.

We continue to explore opportunities to acquire additional reliable and cost-effective flexible capacity for our customers through bilateral negotiations with owners of dispatchable generation resources in the Northwest.

If we are able to secure capacity to meet some or all of our needs through bilateral negotiations, we would submit such agreements to the commission for approval, along with a waiver request of the commission's competitive bidding guidelines as necessary.

As part of the OPUC IRP public review process, we filed comments on March 31, 2017. An additional round of comments will follow in May as we address stakeholder questions and how to identify the best strategy for achieving a renewable, reliable and affordable energy future for our customers. We expect the OPUC to issue a decision on our IRP on or before August 31 of this year.

Following the acknowledgment of the IRP and the outcomes of bilateral negotiations for flexible capacity, we will request approval from the OPUC to issue 1 or more requests for our proposals for remaining capacity needs and renewable resources. As I said before, we have no predetermined outcomes -- outcome for these RFPs. We're open to a wide variety of options and will be seeking the best combination of resources, consistent with the acknowledged IRP action plan to meet our customer's future energy and capacity needs. Resource options include hydro, wind, solar, geothermal, biomass, efficient natural gas fired facilities and energy storage. The RFP process will include oversight by an independent evaluator who reports to the OPUC and overall review by the OPUC itself.

In preparing for the RFP process, we have identified a potential wind benchmark resource in Eastern Oregon with a nameplate capacity of up to approximately 500 megawatts, which would qualify for the production tax credit. The submission of this resource into an RFP is subject to additional due diligence and the negotiation and execution of a definitive agreement.

Moving on to Slide 10. At the end of February, PGE filed its 2018 General Rate Case with the Oregon Public Utility Commission. As previously discussed, the filing is based on a 2018 test year, and will include investments related to keeping PGE systems safe, reliable and secure. The investments include replacing assets at the end of their useful life, strengthening our system to better prepare for storms, earthquakes, cyberattacks and other potential threats as well as investments in operational changes that will integrate more renewable resources and enhance system reliability. The key items of the case are our return on equity of 9.75%, capital structure of 50% debt, 50% equity and a rate base of $4.6 billion. Regulatory review will occur throughout 2017. In early May, a key stakeholder workshop is scheduled to help answer questions before staff and intervener testimony is filed in early June. After which, we will enter into settlement discussions. PGE expects the OPUC to issue a final order by the end of 2017 with approved prices going into effect on January 1, 2018.

Now I'd like to turn the call over to Jim Lobdell, who will go into more depth on our financial and operating results, liquidity, earnings guidance and the dividend increase. Following these prepared remarks, we will open the lines for your questions. Jim?

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James F. Lobdell, Portland General Electric Company - CFO, SVP of Finance and Treasurer [4]

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Thank you, Jim. As Jim mentioned, for 2017, we recorded net income of $73 million or $0.82 per diluted share compared with net income of $61 million or $0.68 per diluted share for 2016. Slide 11 shows a walk-through of our income statement changes year-over-year. A few things to note on this slide are: first, retail revenues increased $26 million for the quarter. This was largely the result of increased retail deliveries to an exceptionally cold winter as well as increased customer prices due to placing Carty into service, partially offset by a reduction in PGE's annual update tariff.

Second, a $5 million decrease in power costs as a result of an average decline in purchased -- in the price of purchased power, but was partially offset with an increase in system loads and a 17% reduction in wind generation.

Third, generation, transmission and distribution costs increased by $9 million due to major storm restoration efforts, Carty related operating expenses and a legacy tool replacement project.

Fourth, administrative and general expenses increased by $4 million due approximately $1 million of Carty litigation expenses and $1 million related to increased employee benefit expenses, from $2 million and other miscellaneous expense.

And finally, an increase in other miscellaneous items such as depreciation and amortization expense due to Carty being placed in service in July 2016 and increased IT hardware and software purchases, partially offset by the Trojan spent fuel amortization.

We also had -- an increased property taxes due to increased Oregon property valuations as well as a decrease in AFDC equity due to lower CWIP balance.

Onto Slide 12, which shows earnings drivers for the quarter. First, gross margin increased earnings by $0.22 due to the following: a $0.27 increase due to higher retail deliveries as a result of colder temperatures; an $0.08 decrease due to lower weather adjusted energy deliveries driven by a leap day in 2016, and lower commercial deliveries in 2017 as a result of storm-related closures, partially offset by decoupling; a $0.03 increase due to lower power prices as a result of favorable hydro conditions in the region, partially offset by decreased wind production. The next driver is a $0.05 decrease related to distribution costs resulting from a $0.03 decrease due to major storm restoration costs and a $0.02 decrease for the replacement of large legacy hand tools with ergonomic, battery-powered operated tools. The third driver is a $0.02 decrease related to Carty. $0.01 per depreciation in carrying costs of Carty's capital spending greater than the $514 million in customer prices and $0.01 for litigation costs.

Finally, a decrease in production tax credits due to lower wind production resulted in a $0.01 decrease to earnings per share.

On to Slide 13. We continue to maintain a solid balance sheet, including strong liquidity and investment-grade credit ratings. As of March 31, 2017, we had $635 million in cash, available short-term credit and letter of credit capacity. $1.2 billion of first mortgage bond issuance capacity and a common equity ratio of 49.8%.

The company has a $500 million revolving credit facility to meet the company's liquidity needs, which has a maturity date of November 2020, an additional letter of credit facilities totaling $160 million.

In 2017, PGE plans to issue up to $450 million of first mortgage bonds, a portion of which will replace $150 million of bank loans maturing in November 2017, with the balance supporting capital expenditures.

As shown on Slide 14, we are reaffirming full year 2017 earnings guidance of $2.20 to $2.35 per diluted share. Guidance is based on the following assumptions: a decline in retail deliveries between 0 and 1%, weather-adjusted; above average hydro conditions based on the current year hydro forecast; wind generation for the remainder of the year based on 5 years of historic levels or forecast studies when the historic data is not available, normal thermal plant operations for the remainder of the year, depreciation and amortization expense between $340 million and $350 million, revised operating and maintenance costs from $540 million to $560 million to $550 million to $570 million, driven by $11 million of major storm restoration costs, including the April windstorm of which $2 million is offset in revenue by existing major storm recovery.

In January, PGE filed for deferral of major storm costs above the $2 million of existing recovery. No action has been taken on this filing and we have not recorded the deferral. More details will become available on the OPUC website under Docket UM1817. Additionally, we expect to incur higher Carty litigation costs and now our full year forecast for Carty-related incremental charges is $0.09.

Turning to Slide 15. Regarding the company's quarterly dividend. On April 26, the Board of Directors completed its annual dividend policy review and approved an increase of 6% for a new annualized dividend of $1.36 per share or $0.34 for the quarter. In comparison to our prior annualized dividend of $1.28 per share or $0.32 per quarter. This increase represents a payout ratio of 60% based on the midpoint of our 2017 earnings guidance. Assuming PGE's ability to achieve current estimates for earnings and cash flow and depending on other factors influencing dividend decisions, PGE's management continues to anticipate sustainable annual dividend increases of 5% to 7%. Over the long term, PGE targets a dividend payout ratio of approximately 50% to 70%.

Back to you, Jim.

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James J. Piro, Portland General Electric Company - CEO, President and Director [5]

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Thank you. Moving to Slide 16. In summary, we continue to focus on successful execution of initiatives that drive value for our customers, our community and our shareholders, including maintaining our high level of operational excellence, with a continued focus on employee and public safety and meeting our operational and financial goals.

Working collaboratively with all of our stakeholders to obtain acknowledgment of our 2016 integrated resource plan and its associated action plan to meet our customers' future energy needs. And finally, achieving a fair and reasonable result in our 2018 General Rate Case.

Now operator, we're ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Julien Dumoulin-Smith from UBS.

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Julien Patrick Dumoulin-Smith, UBS Investment Bank, Research Division - Executive Director of Equity Research for Electric Utilities, Alternate Energy, and IPPs Group and Analyst [2]

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So I wanted to clarify a couple of comments and perhaps just understand a little bit where you stand around the load growth. And specifically, looking a little bit more forward on the need projected in the IRP. Obviously, you've identified 3 factors, reducing the projected need in the updated IRP. But can you discuss a little bit more about continuing to explore opportunities to acquire additional resources through bilateral negotiations? I thought that was what you've already reflected here with Douglas County PUD, for instance. Are there more and just how many more of those kinds of resources are options out there? If you can just help elaborate a little bit.

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James J. Piro, Portland General Electric Company - CEO, President and Director [3]

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So I'll have Jim adjust -- address the load forecast change in a minute, but let me talk a little bit about the bilateral negotiations. We are looking at -- there's a number of resources in the northwest. And loads across the overall Northwest have been down as a result of some closures of aluminum smelters in the region. So I think we are looking at those existing resources to see if there's the opportunity to enter into an agreement, to enter into a contract or to acquire an asset that could meet our capacity needs at a lower cost than building Carty 2 or 3. We continue to permit Carty 2 and 3, but we have an obligation to always look at the least cost, lowest risk options and we are pursuing those bilateral negotiations discussions to see if there is a lower cost option to meet that 560 megawatts of capacity shortfall that we have in 2021. So we're entertaining those conversations and we believe that bilateral negotiations are the best way to do that. To the extent we can identify parties who are willing to enter into cost-effective agreements, we will pursue those. But we continue to hold Carty out there as a backstop to ensure that we have competitive alternatives. And so that's the process we're in right now. We hope to conclude that within the next 2 to 4 months, determine whether those are available, we will then inform the commission of whatever we find in that, in those bilateral negotiations. So I just -- we want to make sure we pursue all opportunities and make sure that we've identified the least cost, lowest risk before we entertain asset types of -- new asset types of acquisitions. Hopefully, that's helpful.

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James F. Lobdell, Portland General Electric Company - CFO, SVP of Finance and Treasurer [4]

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Yes. Julien, on the load side, effectively it's just some of the trends that we've seen out there. We're still expecting a lot of growth in the large industrial side, but as we pointed out before, we're seeing just a little bit of a slowing trend there. We've had that -- loss of that large paper company in the past, and just some -- continued with the operational changes on metals and solar manufacturing side. And then we've got the potential still out there, associated with the long-term direct access.

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Julien Patrick Dumoulin-Smith, UBS Investment Bank, Research Division - Executive Director of Equity Research for Electric Utilities, Alternate Energy, and IPPs Group and Analyst [5]

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Excellent. Can I follow-up on the RFP again, in the context of wind? You say a wind benchmark resource. Is this effectively -- to be interpreted as something that you would be bidding into the RFP with this potential partner as something of a build and transfer? I just want to understand the term, the benchmark resource, if you can.

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James J. Piro, Portland General Electric Company - CEO, President and Director [6]

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First of all, just to get clarity around the renewable RFP, that is predicated on the decision from the commission that we should move forward with a physical resource. We do have existing renewable energy credits on our books that could carry us for a period of time, but we believe because of the value of the production tax credit, it makes sense to acquire a resource now, to take advantage of that 100% or 80% production tax credit before it goes to 0. So to the extent the commission agrees that we need to acquire a physical asset with those kinds of characteristics, we would issue an RFP. Within that RFP, we would file a benchmark resource that we've described in our comments today as a benchmark that we could potentially benefit, or to win in the RFP. We could execute against it, it would be an ownership option for the company.

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Julien Patrick Dumoulin-Smith, UBS Investment Bank, Research Division - Executive Director of Equity Research for Electric Utilities, Alternate Energy, and IPPs Group and Analyst [7]

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And you just described this as being eligible for ITC, is that at the full 100% or is that at the reduced 80% level, for the benchmark resource?

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James J. Piro, Portland General Electric Company - CEO, President and Director [8]

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It's PTCs, and it really depends on how quickly we can move through the RFP and start construction. It's critical that, that project goes online by 2020, is it? By the end of 2020? Yes. It's 100% eligible, but it has to be completed by the end of 2020, I believe, to get the 100%. If not then, it would be 2021 and then would qualify for 80%. So I think it's -- that's why we are trying to move as quickly as we can, to capture that value for our customers. But production tax credit is pretty valuable in terms of reducing the overall cost for our consumers.

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Julien Patrick Dumoulin-Smith, UBS Investment Bank, Research Division - Executive Director of Equity Research for Electric Utilities, Alternate Energy, and IPPs Group and Analyst [9]

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So to be clear about this, it's already qualified for 100% PTC, with the notable risk that if the project isn't completed by 2020, given the timeline of the IRP and subsequently the RFP, that would the risk in which it would drop down?

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James J. Piro, Portland General Electric Company - CEO, President and Director [10]

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You got it.

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Julien Patrick Dumoulin-Smith, UBS Investment Bank, Research Division - Executive Director of Equity Research for Electric Utilities, Alternate Energy, and IPPs Group and Analyst [11]

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Excellent. And under the current timeline, I know you're cautioning this, you would presumably be moving into awarding the RFP when as it stands right now, just to be clear by that?

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James J. Piro, Portland General Electric Company - CEO, President and Director [12]

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Probably midyear 2018. Just depending on how quickly we can move through the process, but we'd like to do it sooner obviously because that would put us in a better position but we have to get the order from the commission this year, and then we have to get the RFP approved and then we have to go through the RFP process. So I think we're targeting midyear next year, which we still believe is sufficient time to get a project completed by the end of 2020.

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Operator [13]

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And the next question comes from the line of Brian Russo of Ladenburg Thalmann.

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Brian J. Russo, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [14]

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Could you just tell us what -- where you are on the PCAM or the dollar amount above or below the baseline?

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James F. Lobdell, Portland General Electric Company - CFO, SVP of Finance and Treasurer [15]

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We're $2 million below the PCAM right now, the baseline.

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Brian J. Russo, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [16]

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Okay. And then, just to clarify on the guidance. You're assuming above normal hydro conditions. Is that the year-to-date actual? Or is that the forecasted April to September hydro season?

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James F. Lobdell, Portland General Electric Company - CFO, SVP of Finance and Treasurer [17]

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That's taking into account what we've seen already for the first quarter. And as you look at the basins that we pull out of, whether it be the Grand Coulee at the top end of the system, the (inaudible) at the bottom end, the Deschutes, the Clackamas River or the other sub basins that we pull water out of, everything this year's over 100% especially the mid-Columbia is up around 123% here at the top end of the system. So it's all looking pretty good. And if Mother Nature is on this call, just tell her we're done. We don't need any more rain. We don't need any more snow.

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James J. Piro, Portland General Electric Company - CEO, President and Director [18]

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The big question, Bryan, is how does it come off. Right now, it's been relatively cold. In fact we're still seeing snow as of the last couple of days up in the mountains. So the real question is, how does it come off and how does that affect the overall region. You're obviously, where California's got a wash of hydro also. The longer it stays colder, the slower the runoff, the more value it provides for us. We get an exceptionally warm May, and the runoff still comes off quickly, then you always have the potential of spilling. And also, because we tend to see high wind, high water together, the value of that hydro gets diminished. So clearly, we'd like to see it kind of stay cold and let that runoff come off slowly, so we see it in July and August, which provides much more value to us, in terms of reduced power cost.

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Brian J. Russo, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [19]

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Right, understood. So to be clear, the guidance reflects the NOA water supply forecast for the current season?

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James J. Piro, Portland General Electric Company - CEO, President and Director [20]

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Yes.

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James F. Lobdell, Portland General Electric Company - CFO, SVP of Finance and Treasurer [21]

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Yes.

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Brian J. Russo, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [22]

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Okay, got it. And then, I'm just curious, hypothetically speaking, if you win the litigation versus the sureties, what's the financial impact? You just take kind of a onetime gain? I'm just curious, in anticipation of what that might be.

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James J. Piro, Portland General Electric Company - CEO, President and Director [23]

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No. We would reduce it against plant and service, because the $640 million, call it, is higher than what we have allowed in customer prices, which I think was $514 million. We would just reduce the CapEx with that amount. So there would be some income statement effects for the amount of depreciation we've run through the income statement and maybe for litigation expenses and maybe some of our cost, carrying costs, but that will all be kind of worked out when we get the final settlement and depending on the amount. But to the extent we are allowed -- we believe we have the right to recover some of our litigation costs and that would help -- that would go to the income statement, since we're absorbing that today.

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Brian J. Russo, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [24]

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Okay, and then lastly, just can you update us on the proposed legislation? Regarding the vote. Well, I think one died, one's ongoing.

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James J. Piro, Portland General Electric Company - CEO, President and Director [25]

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Right. Those are the two bills that, I think were proposed in the legislative session. Both have been kind of pulled back, and they've been transitioned to a study bill.

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James F. Lobdell, Portland General Electric Company - CFO, SVP of Finance and Treasurer [26]

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978.

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James J. Piro, Portland General Electric Company - CEO, President and Director [27]

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978, to a bill called 978, which is a study bill now, which directs the OPUC to investigate these issues that were raised. 979 is dead, and 978 is essentially converted into a study bill. And that is still in the rules committee, and it still has not been approved but that's kind of the direction they're going. So the PUC would conduct a study on all these issues, and then would report back to the legislature as necessary, but...

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James F. Lobdell, Portland General Electric Company - CFO, SVP of Finance and Treasurer [28]

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They're due to come back in September of 2018.

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James J. Piro, Portland General Electric Company - CEO, President and Director [29]

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Yes. Assuming the bill is approved, or...

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Operator [30]

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Our next question is from the line Siddharth Verma of Goldman Sachs.

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Siddharth Verma, Goldman Sachs Group Inc., Research Division - Research Analyst [31]

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Do you see the IRP process as delayed, and how should investors think about what this means for the timeline of building new gas or wind plants?

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James J. Piro, Portland General Electric Company - CEO, President and Director [32]

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So we did delay the IRP a bit at times so we can respond to all the comments raised. In terms of building a gas plant, as I mentioned earlier, we're going to pursue bilateral negotiations first to see if there are any existing resources out there that we could contract for, that could fill that capacity needed of 560 megawatts. If we're unsuccessful there, then we would issue an RFP for capacity. Carty 2 and 3 are still backstops. They would be potential self-build options, but probably would be bid in like we did with Carty 1, which would be, we'd allow the site to be bid in by an EPC contractor. But it would be bid against the other options in the market. So I think the first thing for us to do is to complete the bilateral negotiations. To see if there are any contracts or agreements that we could enter into, that are lower cost, or -- and the alternative, we would then go to the RFP process. So we continue to site those projects. They are kind of a backstop at this point, but they're viable options. The site is permitted, in terms of the size of the site to be able to accommodate these units. We do have to get the permits for the projects. Yes, we're right now in the permitting process.

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Operator [33]

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And our next question is from the line of Travis Miller of Morningstar.

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Travis Miller, Morningstar Inc., Research Division - Director of Utilities Research and Strategist [34]

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I have a higher level, maybe a long-term strategic type question. Been hearing from some utilities out your way that natural gas pipeline midstream is actually becoming more of a constraint than finding electric capacity transmission, generation. Is that true from your view? What are you seeing in that natural gas midstream, the ability to get that gas reliably? Just some thoughts around that. And then, an out-of-the-box thought. Would you ever consider putting midstream gas into a rate base type structure? Or going into that?

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James J. Piro, Portland General Electric Company - CEO, President and Director [35]

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That's a great question. The first question I'd say is, at least for our existing resources, we have adequate transportation capacity for gas to our resources. And as you know, we are in the process of completing with Northwest Natural gas, a storage option called [MO], that would provide storage to our Beaver-Port Westward site. So at least, where we are today, we're in good shape on gas transportation. As we look longer term, the main pipelines probably have adequate capacity. The question is the gathering facilities up in Canada. And ultimately gathering facilities in the Rockies. So those are things we're looking at and always evaluating. And we'll have to consider as we look at the capacity, kinds of resources we have, but we are studying those options. As to your question of whether we would put gas transportation assets into rate base. I think that really depends, in terms of how that goes forward. We believe the gas transportation companies are the best people to provide that service. But as you know, at the end of the day, we're going to contract for that capacity. And so it -- depending on the relationship with their gas pipelines, we might consider that. It would have to be totally aligned with our -- an existing rate base asset, or an asset that we needed to provide service to customers. Because either way, we're paying for it. We're either paying it through a contract tariff rate or we would have it in rate base. They look virtually the same. But typically, we have relied on the transportation, the transport companies to provide that service. They're best suited to that, they understand the rules of the road, but I would say, we do have one small gas pipeline that we do own, it's called K-B pipeline, that provides gas transportation service to our Port Westward site. So laterals, small lines that connect to the main line might be a place we would play, but major lines, probably not.

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Travis Miller, Morningstar Inc., Research Division - Director of Utilities Research and Strategist [36]

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And then you do have the capacity even now, in IRP length of time, trends, the foreseeable future there is plenty of capacity there, right?

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James J. Piro, Portland General Electric Company - CEO, President and Director [37]

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For our existing assets, yes. As we look at future assets, we would then have to acquire and lock-in those transportation assets to be able to fuel those resources. So we're not going to acquire ahead of time, but we would clearly have that. That's an important part of the RFP process, to be able to demonstrate, you have firm transportation capacity, to be able to be field the resources, so.

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Operator [38]

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And the next question is coming from the line of Paul Ridzon of KeyBanc.

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Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [39]

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On the bilateral contracts, are you looking at sort of PPAs, or actually buying physical assets that would be rate based?

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James F. Lobdell, Portland General Electric Company - CFO, SVP of Finance and Treasurer [40]

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Both.

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Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [41]

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And then your referenced wind farm that you would bid into the RFP, how do you feel about the competitiveness of that from an economic standpoint?

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James J. Piro, Portland General Electric Company - CEO, President and Director [42]

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Find out in the RFP, but we believe it's a well-positioned asset. But at the end of the day, it has

(technical difficulty)

RFP process.

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Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [43]

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What's the status of that? Is it just -- someone's kind of done some project development, are you going to be buying the project from them, or how far along is the actual project?

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James J. Piro, Portland General Electric Company - CEO, President and Director [44]

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We really can't talk about that. That's under confidential negotiations at this point.

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Operator [45]

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And the next question is coming from the line of Andy Levi of Avon Capital Advisors.

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Andrew Levi, [46]

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Just real quickly on the potential acquisition of a resource. How does the regulatory process on that work, if you were to go down that road?

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James J. Piro, Portland General Electric Company - CEO, President and Director [47]

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So the way it works right now, if a contract is five years in duration, or greater than 100 megawatts, and we haven't gone through a competitive bidding process, we believe we have to get an approval, or waiver from the commission on not using the competitive bidding process. This has been done by other utilities before. So there is a process to do that. That would help us get certainty that the regulators believe what we've done is prudent. Though ultimately, they have to make that decision in a rate case. So that's kind of a standard we worked under. We have informed the commission staff of this idea, and many of the parties, they're very supportive of doing that first, to ensure that we've looked into the market to see if there's more cost-effective alternatives. So that's the process we would go through. Jim, you have anything to add to that?

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James F. Lobdell, Portland General Electric Company - CFO, SVP of Finance and Treasurer [48]

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No. I mean, it's spot on.

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Andrew Levi, [49]

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Is that for the acquisition of an asset or did you have purchase power agreement or both?

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James J. Piro, Portland General Electric Company - CEO, President and Director [50]

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Both. Either one.

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Andrew Levi, [51]

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And are you currently, I guess, shopping around, is that a good way to put it, for an asset right now?

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James J. Piro, Portland General Electric Company - CEO, President and Director [52]

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We are talking to parties in the Northwest. All the parties who have, we believe resources that would fit our needs.

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Andrew Levi, [53]

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Okay. So if you were to, I guess, you have to get through the IRP process first, right, before you would transact? Is that correct or not?

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James J. Piro, Portland General Electric Company - CEO, President and Director [54]

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No, that's not correct. If we can identify what we believe are competitive alternatives, that would be, what we think, are priced at a very favorable point, we would go ahead and enter into those agreements and then take them to the PUC for approval, and waiver of the competitive bidding rules.

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Andrew Levi, [55]

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So just on the acquisition aspect, which would obviously go to rate base. That, I assume any type of deal that you would make would be contingent on regulatory approvals, that kind of a way to think about it?

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James J. Piro, Portland General Electric Company - CEO, President and Director [56]

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Yes. If they don't give us the waiver, then effectively, then we can't enter into them. So they would have conditions precedent in either agreement, that we'd have to get commission approve or waiver of the competitive bidding guideline.

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Andrew Levi, [57]

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And then, how would it work? I mean, let's say you ended up announcing something this year, acquisition of XYZ asset, doesn't matter for much it's worth, it's for. And then, but the resource isn't needed until 2020, but I would think that the person or the entity selling it would probably want to close report 2020, maybe not. How would that work? Would it go in the rate base sooner? And would you change another resource? Or how would that basically work?

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James J. Piro, Portland General Electric Company - CEO, President and Director [58]

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That's all part of the conversation we're having with the parties out there. Clearly, we'd like to time it with our need, but that's all part of the negotiation. What their needs are and what our needs are, and then how that affects the economics.

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James F. Lobdell, Portland General Electric Company - CFO, SVP of Finance and Treasurer [59]

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And also whether the asset is encumbered by other contracts, purchase power agreements.

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Andrew Levi, [60]

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Okay. So I guess there are various different ways it could work out. But again, if you were to acquire an asset and depending on, I guess on the contracts on it, and -- but let's just go down the road that it actually gets approved. It could go in the rate base sooner than the resource was identified to be needed. Or it could go and when it was supposed to, but it is possible depending on the situation that it could go in '18 or '19 versus going in '20 or '21, is that correct?

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James J. Piro, Portland General Electric Company - CEO, President and Director [61]

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It could, based on the economics and the case we make. I think, clearly we would have to take that through a General Rate case, because renewables -- because renewables have a way to track it in, but these kinds of gas fired resources or capacity things would have -- ownership options would have to go through a rate case. If there was a PPA, then it would go through our power cost immediately through our EUT filing, but again we have to be able to demonstrate that early acquisition makes sense for our customers. So I think the best timing would have these resources come in line in the 2020 to 2021 timeframe but that's all part of the negotiations and the opportunities that are out there.

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Andrew Levi, [62]

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And are there kind of other several opportunities out there, as far as plants that are available, I'm not sure what the market is in your region.

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James J. Piro, Portland General Electric Company - CEO, President and Director [63]

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We're talking to several parties in the Northwest.

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Andrew Levi, [64]

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And I would assume these are kind of newer type plants?

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James J. Piro, Portland General Electric Company - CEO, President and Director [65]

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Doesn't have to be that. It could be from existing -- it could be capacity contracts from existing resources, also.

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Andrew Levi, [66]

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No, no, no. But I guess what I'm saying is, it's not a 20-year-old plan, it's something that's -- somewhat state-of-the-art, I would guess, right? Because this would be a -- if you were to buy, it would be more of a longer-term type commitment, right?

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James F. Lobdell, Portland General Electric Company - CFO, SVP of Finance and Treasurer [67]

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Andy, we're looking at all resources that are out there in the marketplace. So we're not sitting back behind utilities and so we're evaluating all the areas that are possible.

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Andrew Levi, [68]

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Any idea on timing when we may hear something from you guys on that?

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James J. Piro, Portland General Electric Company - CEO, President and Director [69]

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I think it's going to take us, I'd say a couple of months. We hope to get the negotiations concluded in the next 2 to 4 weeks, but they always go longer than they -- we think we can get them done, so. We're keeping our stakeholders appraised of what we're doing and if something were to break, I'm sure we'd let people know.

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James F. Lobdell, Portland General Electric Company - CFO, SVP of Finance and Treasurer [70]

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Just stay tuned, and we'll see how things progress.

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Operator [71]

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And we do have a follow-up question from Travis Miller from Morningstar.

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Travis Miller, Morningstar Inc., Research Division - Director of Utilities Research and Strategist [72]

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I was wondering if you could kind of go through the politics at the state level in terms of potential nuclear subsidies and how this might be similar to the situation you went through several years ago, with the natural gas plants that ultimately was struck down. What are some potential similarities, how does the, how has the political landscape changed and perhaps over the lessons learned from going through that previous process?

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James J. Piro, Portland General Electric Company - CEO, President and Director [73]

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This is related to nuclear?

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Travis Miller, Morningstar Inc., Research Division - Director of Utilities Research and Strategist [74]

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The restructuring, something similar, a subsidy type of the structure for nuclear, relative to the natural gas plant's subsidies, I'll call them subsidies, but several years ago.

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James F. Lobdell, Portland General Electric Company - CFO, SVP of Finance and Treasurer [75]

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Travis, in the state of Oregon, since the closure of the Trojan nuclear plant, you can't build additional nuclear in the state until we've got a permanent repository associated with the fuel. There has been some work that has been done on a small scale nuclear out there, but that's still got quite a bit of additional process and you might say support that's needed in the states to make any change from where we currently are.

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James J. Piro, Portland General Electric Company - CEO, President and Director [76]

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It's a way that I think in terms of what's going on. The company called NuScale down in Corvallis continues to develop a small scale 50-megawatt type unit. Which is interesting, but they have a long way to go to get it to commercial operation, and we're not typically an R&D company. And wouldn't want necessarily be part of that until it's actually proven, and we look at the cost and a structure of such as an arrangement. We do believe nuclear is, if we're going to get to 100% clean future, nuclear may have to be some consideration in that mix of -- in the conversation, so.

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James F. Lobdell, Portland General Electric Company - CFO, SVP of Finance and Treasurer [77]

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But our current polling that we have done, Alex -- the polling that we did in our prior IRP, regarding preferences from energy efficiency to nuclear on the other scale, nuclear scored below natural gas.

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James J. Piro, Portland General Electric Company - CEO, President and Director [78]

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And given what's going on in the east, I don't think we're necessarily ready to step up to any kind of nuclear exposure at this point.

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James F. Lobdell, Portland General Electric Company - CFO, SVP of Finance and Treasurer [79]

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Because they really (inaudible) the company (inaudible)

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James J. Piro, Portland General Electric Company - CEO, President and Director [80]

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Okay. It looks like that concludes the questions. We do appreciate your interest in Portland General Electric and invite you to join us when we report our second quarter 2017 results in late July. Thanks a lot, and have a great day.

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Operator [81]

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Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everybody, have a great day.