Portland General Electric Company — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. PGE is a vertically integrated Oregon electric utility, serving 824,526 retail customers at quarter-end. Interim results are unaudited and subject to seasonal variability.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $411 million | $415 million | $895 million | $864 million |
| Operating income | $57 million | $57 million | $172 million | $118 million |
| Net income | $22 million | $24 million | $91 million | $51 million |
| Diluted EPS | $0.29 | $0.32 | $1.21 | $0.68 |
| Gross margin | 59% | 55% | 59% | 53% |
| Operating cash flow | — | $279 million | $246 million |
Gross margin is a non-GAAP measure defined as revenue less purchased power and fuel expense. Q2 revenue fell 1% and net income fell 8%; first-half revenue rose 4% and net income rose 78%. First-half retail deliveries increased 6% (2.6% weather-adjusted), while average variable power cost declined 13%. Q2 retail deliveries rose 3%; wholesale revenue declined 43% as sales volume and average prices fell.
At June 30, 2011, cash was $72 million, total assets $5.503 billion, total liabilities $3.855 billion, and long-term debt $1.798 billion. There was no short-term debt or current debt maturity outstanding. The company reported a 52.2% debt-to-capital ratio under credit-facility covenants and a 47.8% common equity ratio. Credit facilities had $474 million of unused capacity; PGE had $126 million of letters of credit outstanding. Six-month capital expenditures were $138 million. Dividends declared were $0.265 per share for Q2.
Changes and operating drivers
- First-half net income increased $40 million year over year, mainly on lower power costs, increased retail deliveries, and the January 2011 general rate increase. Q2 net income declined $2 million, with lower costs and higher retail sales largely offset by power-cost adjustment refunds, tax-related regulatory effects, decoupling, and higher operating costs.
- Favorable hydro conditions and lower wholesale prices reduced power costs; hydro energy exceeded normal by 18% in the first half. Thermal generation was economically displaced by lower-cost purchased power and increased hydro and wind generation.
- More extensive planned plant maintenance, higher incentive compensation, employee benefits, delivery-system expenses, and taxes partly offset improved power economics. Plant availability was about 88% for PGE-operated plants in the first half, versus 92% a year earlier; Colstrip availability was 74%, versus 96%.
- Cash from operations increased $33 million. Investing cash use fell to $139 million from $245 million, primarily because of lower capital spending after Biglow Canyon Phase III was completed. Financing used $72 million, including dividends, debt repayments, and commercial-paper repayment.
Outlook, risks and contingencies
- Management projected 2011 weather-adjusted retail deliveries about 1.8% above 2010, or approximately 1% higher excluding certain paper-production customers. It expected 2011 capital expenditures of about $330 million, funded from operating cash flow, with no long-term debt or equity issuance anticipated for 2011.
- A July 2011 forecast indicated an approximately 1.0% decrease in customer prices for 2012 power costs; the forecast remained subject to updates and OPUC approval. New Boardman depreciation-related prices took effect July 1, 2011, with about $8 million incremental revenue requirement for the second half of 2011.
- Longer-term resource plans include competitive bids for flexible and peaking capacity, renewable resources, and baseload energy. Cascade Crossing is estimated at $800 million to $1.0 billion, with a potential in-service date in late 2016 or 2017; project costs beyond 2011 were excluded from the stated capital plan.
- A preliminary settlement of the Boardman environmental lawsuit would impose sulfur-dioxide limits, permit coal operation through 2020, and require PGE and co-owners to fund $2.5 million in environmental projects and $1 million in plaintiffs’ legal expenses. Court approval remained pending; PGE accrued about $2 million as its share.
- The EPA’s separate Boardman notice of violation has no estimated liability; management cited a maximum potential penalty of about $60 million and said the matter could materially affect future results or cash flows. Other unresolved matters include Trojan investment recovery and customer claims, Pacific Northwest wholesale-market refunds, Portland Harbor and Harbor Oil environmental investigations, and recovery of revenue bonds held by Lehman Brothers. Potential losses were not estimable for several proceedings.
- Commodity-price and counterparty exposures include $306 million of derivative liabilities and $10 million of derivative assets at fair value; regulatory accounting defers certain gains and losses. A downgrade below investment grade could prompt additional collateral requests: estimated at about $119 million after a single-agency downgrade or $240 million after a dual-agency downgrade as of June 30.
- Management cited regulatory and environmental changes, weather, generation outages, wholesale energy prices, capital-market access, customer demand, and project execution among key risks. Disclosure controls were assessed as effective; a new financial system was implemented during the quarter and related controls will continue to be monitored.
Most important facts for investors to verify
- Whether the $12 million estimated PCAM customer refund and expected below-baseline power costs change as 2011 results and the regulated earnings test are finalized.
- Actual 2011 capital spending and operating cash flow, including the effect of the $14 million postretirement-benefit trust contribution made in July.
- Final OPUC action on 2012 power costs and the ongoing revenue recovery for Boardman’s shortened operating life and emissions controls.
- Court approval and implementation of the Boardman settlement, and developments in the separate EPA notice of violation and other material contingencies.
- Collateral requirements and liquidity if credit ratings or commodity prices change, along with progress, cost, and financing plans for proposed resource and transmission projects.