Aug 2, 2013
Executives
Bill Valach - IR Jim Piro - President and CEO Jim Lobdell - SVP, Finance and CFO
Analysts
Neil Mehta - Goldman Sachs Mike Bates - D.A. Davidson & Co.
Paul Risdon - KeyBanc Capital Markets Andrew Weisel - Macquarie Research Mark Barnett - Morningstar Equity Research David Paz - Wolfe Research Andy Levi - Avon Capital Ashar Khan - Visium Asset Management
Operator
Good morning everyone. And welcome to Portland General Electric Company's Second Quarter 2013 Earnings Results Conference Call.
Today is Friday August 2, 2013. This call is being recorded and as such all lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions) For opening remarks, I would like to turn the conference over to Portland Electric's Director of Investor Relations, Mr.
Bill Valach. Please go ahead, sir.
Bill Valach
Thanks, Beth and that's Portland General Electric and we're pleased that you're able to join us this morning. Before we begin our discussion this morning I would like to remind you that we have prepared a PowerPoint presentation to supplement our discussion today and we'll be referencing slides as we go through the call.
For those of you joining the call over the phone, these slides are available at our website at investors.portlandgeneral.com. Referring to slide 2, I'd also like to make our customary statements regarding Portland General Electric's written and oral disclosures and commentary, that there will be statements in this call that are not based on historical facts and as such constitute forward-looking statements under current laws.
These statements are subject to factors that may cause actual results to differ materially from the forward-looking statements made today. And for description of some of the factors that may occur, that could cause such differences, the company requests that you read our most recent Form 10-K and Form 10-Qs.
Portland General Electric's second quarter earnings were released before the market opened today and the release is available on our website at portlandgeneral.com. The company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise and these Safe Harbor statements should be incorporated as part of any transcript on this call.
As shown on slide three, leading our discussion today are Jim Piro, President and CEO and Jim Lobdell, Senior Vice President of Finance, CFO and Treasurer. Jim Piro will begin today's presentation by providing a review of our performance in the second quarter and an update on our strategic initiatives.
Then Jim Lobdell will provide more detail around the quarterly results and our expectations for the full-year 2013. Following these prepared remarks, we will open the lines up for your questions and it's my pleasure to turn the call over to Jim Piro.
Jim Piro
Good morning and thank you for joining us. Welcome to Portland General Electric's second quarter 2013 earnings call.
As slide four shows on today's call, I'll provide an update on our strategic initiatives, summarize the progress we've made on the 2014 general rate case, give you an update on our operations and discuss the economy and customer satisfaction in our service territory. Then Jim Lobdell will give a financial update, discussing the quarter's results and our outlook for the remainder of 2013.
As you can see on slide five, we recorded a net loss of $22 million or $0.29 per diluted share. This compares with net income of $26 million or $0.34 per diluted share for the second quarter of 2012, the decrease in earnings was primarily driven by the Cascade Crossing transmission project expense and the customer billing refund.
In addition, operation and maintenance expense increased quarter-over-quarter as we expected and is in line with our full year forecast of $440 million to $460 million for 2013. Excluding these factors earnings this quarter would have been comparable to earnings in the second quarter of 2012.
So let's start with an update on our three generation projects. First the capacity resource on slide six, we broke ground in May on Port Westward 2, our new 220 megawatt natural gas plant.
This plant is expected to cost approximately $300 million excluding AFDC and is scheduled to be operational in the first quarter of 2015. We expect to file our general rate case in early 2014 with a 2015 test year to recover the costs, which by itself may result in a customer price increase between 3% and 4%.
We also entered into two power purchase agreements with Iberdrola for seasonal peaking resources to meet needs identified in our IRP action plans. The first agreement provides 100 megawatts of summer capacity and the second provides 100 megawatts of winter capacity.
Now to our baseload resource on slide seven, we're moving forward with Carty Generation Station, a 440 megawatt natural gas plant next to our Boardman Coal plant. We expect the project to come online in mid 2016 and cost approximately $450 million excluding AFDC to bring this resource in the customer prices we anticipate filing general rate case in 2015 or 2016 to recover the cost, which by itself may result in a customer price increase of between 6% and 7%.
Lastly turn to slide 8, for an update on a renewable resource, I'm very pleased to announce that yesterday we closed the asset purchase agreement with Puget Sound Energy, for the right to develop phase II of the Lower Snake River wind farm in south east Washington. With this agreement finalized we are renaming the project Tucannon River Wind Farm after the Tucannon River which runs north of the project.
RES will construct the 267 megawatt wind farm installing 116 Siemens Turbines on about 20,000 acres. Overall, we expect Tucannon River to cost approximately $500 million excluding AFDC and come online in the first half of 2015.
We may use either a general rate case or the renewal energy adjustment clause mechanism to recover the cost which by itself may result to the customer price increased at between 4% and 5%. We are working hard to deliver operational efficiencies throughout the company and investigating other strategies to offset this customer price changes.
Slide 9, provides a summary of the company's five year capital expenditure forecast including expected spend patterns for the three new generation projects. Based on these we estimate 2017 average rate base to be about $4.5 billion, these new projects are the lease cost lowest risk resources and will be used to meet our customers' long term energy needs with reliable, cost effective, efficiently generated power.
We look forward to completing this project on time and on budget. Moving to slide 10, we filed the General Rate Case in February with a 2014 test year and have now reached settlement with the OPUC staff and interveners on all items except pension expense.
PGE and the parties have stipulated to a 9.75% ROE, a capital structure of 50% debt and 50% equity, and an average rate base of $3.1 billion. In addition, our decoupling mechanism has been extended with a few minor modifications for additional 3 years through 2016.
Over the next several months, we will continue to update power cost, debt cost and our retail load forecast for the 2014 test year. Our most recent updates for these items as filed on July 17, led to an additional $19 million of revenue requirement for an estimated total increase of approximately $79 million.
We expect a final order from the commission to be issued in mid December resulting in an average overall price increase of approximately 5% effective January 1, 2014. Now on to operational update on slide 11.
As we disclosed on July 15, the Boardman and Colstrip coal plants have experienced recent outages. Boardman of which we own 65% tripped offline on July 1 due to a temperature shock in the cold reheat pipe.
We have repaired the line and rebuilt the pipe support structure enabling the plant to come back online earlier this week. We estimate our replacement power cost will total $3 million to $4 million.
Colstrip Unit 4 which we own 20% but do not operate also tripped offline on July 1. A generator failure caused damage to the stator and the rotor and we are expecting the units to be offline for the remainder of the year.
We estimate our replacement power costs will be $7 million to $8 million to the rest of 2013. Engineering estimates indicate outage repair costs could total approximately $10 million for Boardman and between $30 million and $40 million for Colstrip Unit 4.
Growth plans have insurance coverage and providers have been notified of potential claims. At a minimum, we will incur our ownership share of the $2.5 million insurance deductible at each plant.
We expect that the majority of the repair cost not covered by insurance will be capitalized. Now let's move on to slide 12 for an update on the economy and our customers.
Oregon's economy continues to show positive signs. The residential housing market has been improving since last year and we continue to see growth in Oregon's building permits.
In addition, we've seen strong employment growth in construction, business services and leisure and hospitality sectors so far this year. Oregon's unemployment rate has dropped to 7.9% in June compared with 8.2% at the end of the last quarter and 8.8% a year ago.
The unemployment rate in our core operating area of 6.8% in June down from 7.2% at the end of the last quarter. The state continues to demonstrate strong immigration and PGE continues to add new customers each quarter.
In addition, weather adjusted energy deliveries grew this quarter which Jim will discuss later. Our overall customer satisfaction continues to be very strong.
PGE ranks in the top [debt] file for both residential and general business satisfaction and market strategies international's most recent surveys. We also ranked second nationally for a large key satisfaction in TQS's Research Incorporated annual survey.
Now I would like to turn the call over to Jim Lobdell who will discuss our financial results for the second quarter and review our expectations for the rest of 2013.
Jim Lobdell
Turning to slide 13, the second quarter of 2013 recorded a net loss of $22 million or $0.29 per share compared to net income of $26 million or $0.34 per share for the second quarter a year ago. This decrease was driven by a $52 million expense related to the suspension of the Cascade Crossing Transmission project, and $9 million customer refund and a $12 million increased operating and maintenance expense related to our generation and distribution system.
Excluding the impact of these factors, earnings this quarter would have been comparable to the earnings of the second quarter of 2012. Moving to slide 14, total revenues for the quarter were $403 million, down $10 million from the same period last year, primarily due to a $9 million refund to an industrial customer who is incorrectly build for several periods.
Energy deliveries, adjusted for weather were up 2% quarter-over-quarter. We've seen notable increases in residential and commercial deliveries and industrial deliveries continue to grow as well.
While the second quarter growth was better than the first quarter of this year, our year-to-date energy deliveries adjusted for the lease day are approximately flat compared to the first six months of last year. As a result, we are expecting relatively flat energy deliveries for the full year compared with 2012 weather adjusted levels.
Purchase power and fuel expense were flat quarter-over-quarter. Hydro generation from PGE is owned and mid-Columbia hydro resources decreased 12% this quarter compared to above average conditions a year ago.
Thermal generation increased quarter-over-quarter; accounting for 23% of PGE's retail load requirement and generation at our Biglow Canyon Wind Farm was comparable quarter-over-quarter. Power cost in the second quarter were higher than forecast in 2013 annual power cost update tariff that were offset by an increase total sales.
As a result, net variable power cost of $13 million below the [ATE] baseline for the second quarter compared to $5 million below the baseline from the second quarter of 2012. For the full year including the effects of replacement power cost for the coal plant outages, we expected net variable power cost to be within the PCAM.
Moving to slide 15, production, distribution and administrative cost totaled a $119 million this quarter, $12 million higher than the second quarter of 2012. As expected, pension expense increased by $2 million and maintenance expense for our generation and distribution systems increased by about $10 million.
O&M expense can vary from quarter-to-quarter due to seasonal factors but it's important to note that we are on track for our full year on O&M forecast of $440 million to $460 million. Interest expense decreased $2 million quarter-over-quarter due to the maturity of two tranches of first mortgage bonds that were redeemed to good cash $100 in October of 2012 and $50 million in April 2013.
Income taxes decreased $20 million quarter-over-quarter due to the lower pretax income resulting primarily from the suspension of Cascade Crossing Project. Now onto slide 16, we continue to maintain a solid balance sheet including investment grade credit ratings and strong liquidity.
As of June 30, 2013; we had $787 million in cash and available credit and an equity percentage of 50.4%. In June, we successfully executed equity on debt financing.
We completed the public offering at 12.7 million shares of common stock at an operating price of $29.50 per share using a four sale transactions, 1.7 million shares were issued in June, and the remaining shares are expected to be issued over the next two years. We also closed the debt offering in the private placement market for $225 million of first mortgage bonds at 4.47% separated into two tranches, a $150 million was issued in June and $75 million will be issued by the end of August.
The remainder of the year we expect to issue equity using the forward structure that we currently have outstanding and additional debt for a combined total of a $175 million to 225 million. I'm also pleased to report that on June 28, Moody's upgraded our long-term credit ratings moving our issuer rating from BAA2 to BAA1 and our first mortgage bonds from A3 to A2.
This improvement reflects the constructive regulatory environment and a stable financial profile with adequate liquidity. Now let's discuss our outlook for the remainder of 2013.
As shown on slide 17, as you recall, we revised our guidance on June 3. We are now reducing our 2013 guidance by an additional $0.10 to a $1.25 to $1.40 due to the $10 million to $12 million of replacement power costs for the outages as a Boardman and Colstrip plants.
And slide 18 displays, our revised full year guidance include the following assumptions. Energy deliveries comparable to weather adjusted 2012 levels, O&M expense between $450 million to $460 million, D&A expense between $240 million and $250 million and capital expenditures between $710 million and 730 million.
Now back to you Jim.
Jim Piro
Thank you. Although, we had several factors that impacted our operating and financial performance this year, we're looking forward to entering a significant phase of growth with a construction of three new generating plants.
We are moving forward with our IRP action plan to bring these resources online, on time and on budget to meet our customers' long-term energy needs. Now operator, we're ready for the questions.
Operator
(Operator Instructions) Our first question today will come from Neil Mehta with Goldman Sachs.
Neil Mehta - Goldman Sachs
Congratulations on the rate case results. Quick question there.
Is the pension item still outstanding as that was an item that was still to be determined in the settlement or has that been resolved in the (inaudible)?
Jim Lobdell
Neil, it's still outstanding, it's the only item that's outstanding still, because there's multiple utilities involved in at this pension discussion. There is a separate docket associated with it.
So, we are going to be moving through that here shortly.
Jim Piro
Yeah, we also filed rebuttal testimony in the case on that issue. We expect staff testimony next week I think it is.
So, that will help us understand staff positions who may either just resolve this within the General Rate Case or as Jim talked about, we have this generic docket just to stay on top quickly that proceeds through the year.
Neil Mehta - Goldman Sachs
And just to confirm you have no expectation to change your CapEx schedule in light of some of the challenges by Troutdale on the RFP. And can you just remind us where we stand with that docket and that challenge?
Jim Piro
So, no, we are moving forward with our projects. We feel like we've run a very good process and we had the independent valuator to review the process.
So, PC has got a potential for a declaratory ruling before the commission. They were supposed to have raised that on August 6, but it's been rescheduled to September 19 special meeting.
So, the OPUC will address that issue in mid-September and we will see where they go with it, but again we're moving forward with the project. As you know, our benchmark did not win that bid.
It was a third-party bid on our site and we feel like it's a good project for our customers that provide long-term value.
Neil Mehta - Goldman Sachs
And last question. Just, could you walk us through the right inventory strategy in terms of getting each of these assets into rates, when you expect to file, when you expect to ultimately get each of the assets integrated?
Jim Piro
So let's take one at a time. I talked a little bit about it in my script, but just to remind you.
The Picker will come on probably either in the ‘14 or early 2015, we just have to see how construction goes. Our plan right now is to file 2014 Generate Rate, file our rate case to the 2015 test year in early 2014 with that included in the overall revenue requirements and in rate base, with prices to be effective when that resource goes in to service.
So that's the first one. Exact timing of that will depend on when prices change, and we're still working on our strategies around that.
The baseload resource, Carty generating station, we again expected to go into service in mid-2016. We will either file a 2016 General Rate Case or a 2017 General Rate Case or even potentially a split year, test year to recover the cost of that resource, again through a General Rate Case as the way we will do that.
And the third one is the renewable resource. We think that will come online in the first half of 2015.
We haven't really decided how we're going to recover the costs. We either use the combination of the renewable adjustment clause and/or General Rate Case to recover the cost of that resource, like we use the renewable adjustment clause for the period time when the project comes into service and then track and either through renewable adjustment clause or a General Rate Case in this subsequent year.
So I think we've got a good strategy. The price increases are fairly minimal and we are looking at strategies to offset that cost and trying to capture operational efficiencies again to offset the cost of these projects.
Operator
Moving on to our next question, we will go to Mike Bates with D.A. Davidson.
Mike Bates - D.A. Davidson & Co.
As I look at slide nine, just examining your CapEx forecast, I am wondering how from are you on the timing from year-to-year with these projects, is there, have you built in room for any potential slippage in construction timelines or what not?
Jim Piro
These are our best estimates of the construction schedule that we guide in place. It's fairly predictable at this point.
We have turbine orders in. We've got projects plans in place.
The contractors are moving. We feel pretty good about this spend.
So obviously if there is something that's out of our control that happens related to weather or some type of force majeure things could change, but right now these are our best estimates of the capital spend. And given the nature of these projects, we feel pretty good about these numbers.
Mike Bates - D.A. Davidson & Co.
Sure. And as we think about 2014, obviously by far the peak year in this CapEx budget, can you give us any picture as to -- is the spend going to be fairly stable from quarter-to-quarter or is it weighted toward either half of the year?
Jim Piro
We haven't got the monthly cash flows. My guess is it's going to be fairly equal through the year.
Obviously it will be a little lower in the winter season when we can't get in and do construction. So, we haven't done the monthly forecast also.
We really haven't given any guidance on the actual monthly flows.
Mike Bates - D.A. Davidson & Co.
All right. And then with regards to taken delivery of your equity capital, did I hear correctly that you would anticipate in 2013 that total being from 75 million to 125 million of the overall total?
Jim Piro
Jim do you want to address that?
Jim Lobdell
175 Michael, it's 175 to 225. And that includes both debt and…
Mike Bates - D.A. Davidson & Co.
175 to 225.
Jim Lobdell
Yeah, both debt and equity.
Mike Bates - D.A. Davidson & Co.
All right. And remind me, does that include any long-term debt that has not yet been disclosed or priced?
Jim Lobdell
Yes, it does.
Operator
And we will now go to Paul Risdon with KeyBanc.
Paul Risdon - KeyBanc Capital Markets
Can you just give some more detail on the lumpiness of O&M throughout the year and kind of what is driving that?
Jim Piro
I mean we do have seasonal flows. Most of the challenges with O&M each year is when the plants go under construction, our maintenance during the outages.
And so Jim can give you a little better sense of that on the difference between last year and this year on the O&M side, but there is certain amount of seasonality to our O&M based on the maintenance at our plants.
Jim Lobdell
Yeah, there are outage that we typically take that are based on cycles associated with generating plants. You will do it one year and you want do it the next year.
So, that's driving a bit of the difference. We've had fewer heating degree days out there over the last couple of quarter.
So that's creating some differences there as well. In addition, we've had, if you look at last year versus this year, last year was very high, high growth year, we were 126% of normal event.
So we had a lot of displacement associated with the power plant. This year for a hydro year, we're running the plants more, which means you're going two more cycles, which means that you're getting a bit more O&M expenses associated with it.
But the key thing to keep in mind is when you look at it from an annual basis, we're expected to come back in line by year end.
Paul Risdon - KeyBanc Capital Markets
Thanks. And when do you expect normal wind conditions for the year, is that kind of a revised wind resource analysis or is that the original?
Jim Lobdell
It's revised. And I would note that in the General Rate Case, we did update the forecast to our best forecast wind would look like, the commission adopted that forecast 2014 and we continue to looking at as we go through each subsequent test year, but it was a recognition that the wind hasn't generated in the past and I believe we're going to the four year rolling average -- five year rolling average on the forecast of wind, which will help through step up over time.
Paul Risdon - KeyBanc Capital Markets
And then it sounds like you are going to be pretty busy on the regulatory front over the next few years. Is there going to be a discussion about kind of transfer of risk of the sharing mechanisms for power supply cost?
Or is that something-
Jim Lobdell
The utilities are looking at the PCAM mechanism right now, and out on the PacifiCorp was effectively handed the same PCAM mechanism that we have got. And so we're comparing notes with PacifiCorp and others and plan on having a discussion with the Commission on the ability to make improvements in that mechanism.
So we're still very early in the process at this particular point in time, so it's hard to say what those conversations are going to look like.
Paul Risdon - KeyBanc Capital Markets
And then just lastly the discussion around decoupling and the extension there, was that a controversial issue or do you think maybe we may just see decoupling into the future as far as we can see.
Jim Piro
You know I don't want to say a long term future at least the next three years it's in place. I think everyone finds the mechanism to be a right balance of risk and reward.
It takes away the disincentive to encourage energy efficiency. You know we've been a real supporter of energy efficiency and we used the Energy Trust of Oregon to implement those programs.
So I think it's a good mechanism and it allows for both the ups and downs on customer use and so overall we think we made some small minor modifications to the mechanism but they're very minor related to the new customer use per customer. So overall I think it's a good mechanism.
There was very little controversy around that mechanism. Again it applies to our residential and small commercial customers.
Operator
And we'll now hear from Andrew Weisel with Macquarie Capital.
Andrew Weisel - Macquarie Research
A couple of questions to follow-up on some what's been discussed. You mentioned you're going to consider using a combination maybe of general rate case and the rider of the recover the renewable costs.
Why wouldn't you just use the rider? I thought that was one of the more favorable mechanisms at your disposal because it's straight forward and simple.
Why would you consider even partially using a general rate case?
Jim Piro
Well, the way we would do this as the year of the project goes in to service, we've used the renewable adjustment clause. In the subsequent year, you would then -- you could use the renewable adjustment clause to put the rate, the prices in [took] place on January 1.
But if we also have a general rate case, are contemplated for that exact same period, you would essentially include it in the general price change overall. It just would be simpler that way rather than having a rider tariff.
So it really depends on the timing of other things that we're doing. If there's nothing else going on, we would use the RAC but if we have a general rate case going in to service on 2016, we would just incorporate that investment in to that rate base and move forward it.
There is no reason to have that extra clause out there. So we have a couple of options and it really depends on how we look at our regulatory strategy as we get close to that timeframe.
Andrew Weisel - Macquarie Research
Okay, that's helpful and the repair cost related to two coal plants. You said those will be capitalized.
When might those be recovered? Would that be folded in to next year's rate case or could it be slipped in to the current one?
Jim Piro
So what we do is in the 2014 test year or 2015 test year, what we file in 2014, whatever that remaining investment would go in to our capitalized rate base and be recovered on a going forward basis. It's likely to be very small just because we think most of the cost will be covered under our insurance program and it will be recovered on the life of the asset.
Andrew Weisel - Macquarie Research
Very good, next question is on load growth, it looks like you're now expecting this year to be flat relative to a previously you said, 0.5% to 1%, can you maybe talk about the 2Q actual weather adjusted load growth and maybe similar, underlying trends you're seeing in terms of the economy, looks like the account growth was there. So what else am I missing?
Jim Piro
Yeah, we had a really good strong second quarter and very pleased to see it kind of rebound from what we saw in the first quarter. So that's encouraging news, I think we're being still a little bit pessimistic in terms of how things are going as the Oregon economy is starting to improve, but we've been relatively conservative in terms of how this is ultimately going to play itself out through the rest of the year, Jim can you give us some specific details on it?
Jim Lobdell
Yeah, we saw growth in all sectors effectively in the second quarter, so it was on a weather adjusted basis, so that was good news. We're still trying to figure out what happened in the first quarter of the year, where we saw quite the opposite.
So when we look at it from an annual perspective, we said we need be a little bit more conservative on what we think our load forecast looks like, because it would take a pretty good lift in order to get back to 0.5% or 1% so. We took the lateral approach and so effectively we think it's going to be flat to 2012.
Jim Piro
By the end of the third quarter, we'll have better look to see how that growth is manifesting itself and whether there -- it's basically sticking.
Andrew Weisel - Macquarie Research
I thought, the first quarter was flat ex-weather in adjusting for the leap date, current -- now look – you're saying 1Q was actually negative, could you have the numbers for 1Q and 2Q?
Jim Lobdell
For the first Q, on a weather adjusted basis.
Andrew Weisel - Macquarie Research
You said it was flat on the last call?
Jim Lobdell
Yeah, when you take out the leap day and other adjustments, but when you look inside it, and we are trying to figure out what the trends are it becomes a bit more confusing as to why with the trends you are seeing from the economy, unemployment rates or new connection going where economic outlook looks for the State of Oregon. We would have expected more of an increased than we did in the first quarter.
Andrew Weisel - Macquarie Research
Okay, fair enough, and then lastly to whatever degree you are able to comment with this trout request, what are some possible range of outcomes, you know, best case scenario, I would assume is that the commission just dismisses it, what sort of realistic negative possible outcome for you guys whether its financial or timing or whatever?
Jim Pior
As you know, as I see it playing out we just have to see, I think you got the best case, right, the worst case is that, I guess the commission could move forward with an investigation on this issue. Ultimately, we will go through a prudence review and this resource goes in the service which is them if they would review whether we've delivered these projects on time and on budget.
It's hard to tell where it is going to go, but I think we feel like we have followed the process is going to laid out for us. The only we did not ask for was acknowledgement of the shortlist but because of the need to move forward on this resources and preserve the economic value that was bid into the process, we felt we had borrowed everything and hopefully the commission will sustain at position, but it's hard to tell where it could go but maybe the worst cases they do open investigations and look at the issues.
But again, I feel like we've done everything correctly according to process that was laid out and we've identified the leased cost lowest risk resource for our customers.
Operator
And we'll now go to Sarah Akers with Wells Fargo.
Sarah Akers - Wells Fargo
Just one question on the guidance. With the PKM falling 14 million below the baseline year-to-date, why is that benefit not offsetting the higher $10 million to $12 million in outage related costs, was that positive PKM benefit already embedded in the prior guidance or what am I missing there?
Jim Lobdell
Sarah, really gets down to the fact that we're looking at two different metrics, you are looking at the income statement versus looking at the PKM mechanism and how the two are accounted for the PKM mechanism takes into account that the net of wholesale sales. And where an income statement it's split out.
So there is some…
Jim Pior
Yes, I think you got about right. Sarah, if we put our guidance together, there is some assumption of improvement in overall power cost, some of it's been there.
There is a wide range for our guidance and some of that will depend on what happens in overall power markets associated with hydro and other thing. So, essentially that, I think you got it about right.
Not the whole but there is some of it's in there.
Sarah Akers - Wells Fargo
So, is it an expectation of what's going to happen in the second half of the year, besides the outages that's going to bring that back kind of to normal which I would assume is in better than guidance or you saying that better the normal on the PKM wasn't embedded originally?
Jim Lobdell
Not following your question?
Sarah Akers - Wells Fargo
I can follow-up offline.
Jim Lobdell
Yeah why don't you follow-up offline because I think there's just all bunch of things that are moving on, you know, most of the power costs under in came in the second quarter, we still have the rest of the year to go and things can always change, the hydro comes off early, it depends on the shape of the hydro, there's a whole bunch of things that happen when we look at the year, the quarter-to-quarter distribution on power cost.
Operator
(Operator Instructions) And we will now go to Mark Barnett with Morningstar Equity Research.
Mark Barnett - Morningstar Equity Research
Two quick questions, with the culture for placement power given that you expect it through the end of the year have you already essentially fully contracted for that through the year end 2013?
Jim Lobdell
We have hedged the power costs since we found out that the plant was going offline. We went out and we hedged the majority of that risk.
It's a little bit of shoulder hours that we didn't bother to cover because you got a win that will peak up in the evening and it didn't make sense for us to go ahead and hedge that part. But we did all of that peak load pretty much.
Mark Barnett - Morningstar Equity Research
I know you announced this in June and might be too early to really give more details but with the Cascade agreements, is there any chance for you to talk about the term and exchange for certain PGEF based investments or transport capabilities, what that might entail, or is it too early?
Jim Pior
No, it's still too early to tell. We're in detailed conversation with Bonneville on a type of an agreement that would allow us to meet our capacity, long-term transmission capacity needs and help them meet some of the needs they have on the overall system performance and reliability.
So we're really working with the parties very closely. They try to work out what the arrangement would be.
If we can reach that agreement, then we would ultimately have to take that agreement forward to get regulatory acknowledgement and at that time we would like to address what the commission are investment in Cascade Crossing which has really been the precursor to the conversations we've had with Bonneville as the whole transmission situations change in the west. So we're working hard with Bonneville right now on that issue and we would just have to see if we can get to an agreement between BPA and PGE on meeting our needs and their needs.
Operator
And moving on, we will now go to David Paz with Wolfe Research.
David Paz - Wolfe Research
Quick question. Does the $4.5 billion average rate investment for 2017 include your assumption of your cumulated deferred tax balance?
Jim Pior
Yes, we forecasted right in there.
David Paz - Wolfe Research
Okay, do you have any sense of, if we look at what was in your 2014 rate case, the balance you got in there, how much does it grow in 2017?
Jim Lobdell
I want to you to give Jim a call maybe he can give us a little detail on that. We don't have it here.
We would just forecast those deferred taxes as part of our overall structure and the tax rates that we expect.
David Paz - Wolfe Research
Great, despite from the potential transmission agreement that you just discussed, are there other potential projects outside of your ‘13 or ‘17 capital plans, particularly as I guess we approach the 2020 I guess deadline?
Jim Piro
We are right now in current integrated resource planning discussion that we will file later this year. There is really not a lot of resources on the table or decisions that are critical in this IRP.
The next IRP we will file which probably be a couple years after now, so 2015ish or may be 2016. We do have to address both the Boardman replacement and our strategy to address that in 2021.
We'll have another 5% of renewable energy that we are going to have to add to get to the 2020 target of 20%. And so IRP is relatively light, but the next IRP will be a fair amount of conversations on how we meet those obligations and we will work with the constituents and all our parties to figure out what the lease cost lowest risk solution is on those decisions.
David Paz - Wolfe Research
Okay. And I guess just regarding our PSO, I know there was some discussion about vote initiative include large hydro power, you know where that stands right now?
Jim Piro
The parties are doing ballot title testing and they are probably want to collect both signatures to get that initiative on the ballot. We do understand that the environmental teams or groups maybe looking at increasing the RPS standard also as a potential counter to that measure, so it's still little bit in the state of flux.
And we believe what put in place is a good policy. It's unfortunate that that one party thinks that that they want to change a little bit.
When it was designed, it was designed with the assumption that we were going to exclude hydro. So if we had been including hydro, I think the discussion would have been about a higher RPS standard because the whole thrust of the legislation was to increase the amount of renewables not just to recognize what was already in place.
So we will see how that goes and we think that the curve legislation is solid and we would like to see it continue.
Operator
And our next question will come from Andy Levi with Avon Capital.
Andy Levi - Avon Capital
See one question was asked. Second one I didn't listen to that closely.
So maybe if we can just go over it real quickly. On the equity side, as far as how much equity did you say you would draw down this year?
Jim Piro
We didn't say specifically, we said combination of debt and equity from 175 to 225, about a third that will probably be equity. We are still sticking to our plan I want go guess going to match our equity draws in the forward structure to our capital expenditure programs.
Jim Lobdell
So we have a lot of flexibility in the forward structure and how we draw that equity and so we do have some ability to move that around as we need the capital.
Andy Levi - Avon Capital
And then with rate base going up actually 50% is impressive from now just 2017 based on your rate base forecast. How should we think, I know you discussed this before, but your lag number is pretty stagnant as far as the expense itself, so should we assume that the ROE lag should lease because it have if not more is that kind of the simple way to look at it by 17?
Jim Lobdell
Yeah, the most of the cost that we don't get recovery for a fairly fixed and other than little bit of inflation on those. So as we grow rate base and grow our earnings, those numbers become a smaller percentage, I don't know if it's exactly half, but they will go down and reduce the difference between our regulatory ROE and our actual ROE which will help it.
Andy Levi - Avon Capital
So I guess if rate base goes up 50%, it's kind of a simple math I guess right?
Jim Lobdell
Yes.
Operator
(Operator Instructions). We'll now go to Ashar Khan with Visium.
Ashar Khan - Visium Asset Management
I guess just elaborating on Andy's question, is there some way write the forward how should we think of the draw each year, is there some rough percentages you could give us that how it would be drawn based on the CapEx forecast?
Jim Lobdell
We've been pretty clear, we want to keep our capital structure about 50% debt, 50% equity, we'll use that as a guiding principle as we go forward. I think for purpose of modeling that's probably as good as assumption or maybe month to month differences as we look at what's the optimal way to drive capital.
To the extent we're going to issue new debt, we want to factor that into that discussion. So for modeling, I think that's closed enough, for actual we'll be moving that around based on the needs for additional debt financing and the timing of that.
Ashar Khan - Visium Asset Management
Could you give remind us how the forward was for how long of a period?
Jim Lobdell
It's for a two year period
Ashar Khan - Visium Asset Management
For two year period.
Jim Lobdell
We want to draw by June 11 of 2015
Ashar Khan - Visium Asset Management
Okay. Thank you so much.
Jim Piro
Okay, I don't think we have any other calls. We really thank you and appreciate your interest in Portland General Electric and invite you to join us when we report third quarter 2013 results in November.
Thanks a lot and have a great summer.
Operator
That does conclude today's program. Thank you all for joining today.