PORTLAND GENERAL ELECTRIC CO quarterly report, Q3 FY2010

Business context and reporting period

Portland General Electric Company (PGE) is a vertically integrated electric utility serving Oregon, with wholesale power and natural-gas activities in the western United States. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods unless noted. PGE served 822,407 retail customers at quarter-end.

Financial performance and position

Metric	Q3 2010	Q3 2009	Nine months 2010	Nine months 2009
Revenue	$464m	$445m	$1,328m	$1,319m
Operating income	$90m	$62m	$208m	$170m
Net income attributable to PGE	$49m	$32m	$100m	$87m
Diluted EPS	$0.65	$0.43	$1.32	$1.21
Operating margin	19.4%	13.9%	15.7%	12.9%

Operating margin percentages are calculated from reported revenue and operating income. Dividends declared were $0.260 per share in Q3, versus $0.255 a year earlier; nine-month dividends were $0.775 versus $0.755.

Cash flow: Nine-month operating cash flow was $317m, down from $377m. Capital expenditures were $384m, versus $544m; net investing cash outflow was $364m versus $546m. Financing provided $23m versus $205m. Cash ended at $7m, compared with $31m at year-end 2009.
Debt and liquidity: At September 30, short-term debt was $20m and long-term debt was $1,808m, totaling $1,828m, compared with $1,744m at December 31, 2009. PGE had $334m of unused revolving credit, $9m of commercial paper, and $257m of letters of credit. Its covenant debt ratio was 53.4%, below the 65% limit; common equity ratio was 46.7%.
Assets and equity: Total assets were $5,617m and total equity $1,585m, versus $5,172m and $1,543m, respectively, at year-end 2009. Current assets were $750m and current liabilities $520m.

Material changes versus prior comparable periods

Q3 attributable net income rose 53%; nine-month net income rose 15%. Management attributed much of the improvement to Oregon SB 408 income-tax rate treatment, including the effect of federal bonus depreciation enacted in September 2010—notably a Q3 estimated $20m customer collection, compared with a less-than-$1m refund in Q3 2009.
Purchased power and fuel expense fell 10% in Q3 and 8% year to date, mainly as average variable power costs declined 8% and 7%, respectively. Q3 average variable power cost was $38.12/MWh versus $41.54/MWh.
Retail deliveries declined 2.7% in Q3 and 3.9% year to date; weather-adjusted nine-month deliveries fell 2.4%. Management cited weak economic conditions and weather, partly offset by industrial growth and customer additions. Wholesale revenue declined 19% year to date.
Capital additions increased depreciation expense; interest expense also rose year to date, partly reflecting a higher average debt balance. PGE issued $249m of long-term debt and repaid $186m during the first nine months.

Outlook, commentary, risks and contingencies

Demand and cash outlook: PGE projected 2010 weather-adjusted retail deliveries about 1.5% below 2009 and 2011 deliveries flat against projected 2010 levels. Management expected 2010 operating cash flow of approximately $410m and capital expenditures of approximately $473m; $384m of capital spending had been incurred through September.
Rates: A 2011 general rate case was pending OPUC approval, with a final order expected by mid-December 2010 and new prices expected January 1, 2011. Proposed stipulations implied about $59m of annual revenue increases, or an approximately 3.5% customer-price increase; this remained subject to regulatory approval.
Boardman: PGE completed the 175-MW Biglow Canyon Phase III wind project in Q3. Boardman emissions-control requirements and the proposed 2020 coal-operations end date remained under regulatory review. Estimated control costs and timing vary by option; the OPUC staff recommended acknowledging PGE’s integrated resource plan, with an OPUC decision expected after a November 2010 meeting.
Regulatory and legal exposure: On September 28, 2010, EPA issued a Notice of Violation alleging Clean Air Act violations at Boardman; penalties were not specified and PGE said it could not estimate potential liability. Separate environmental plaintiffs estimated claims could reach approximately $60m. Other matters include Trojan-related refund/class-action proceedings, Pacific Northwest power-market refund proceedings, a Boardman outage lawsuit seeking more than $15m, and Portland Harbor and Harbor Oil Superfund matters. Management said outcomes could materially affect future-period results or cash flows, though it did not expect a material adverse effect on financial condition.
Liquidity and market risks: PGE had posted approximately $354m of collateral with counterparties. A downgrade below investment grade could prompt additional collateral requests estimated at $102m for a single-agency downgrade or $225m for a dual-agency downgrade as of September 30. Commodity prices, hydro conditions, plant outages, weather, regulation, capital-market access, and weak regional economic conditions were identified as risks. Management reported no material change in market risks from its 2009 Form 10-K.
PGE stated that disclosure controls were effective as of September 30, 2010, and that there were no materially affecting changes in internal control over financial reporting during the quarter.

Important facts for investors to verify

How much of reported earnings growth reflects SB 408 tax-related customer collections and bonus depreciation, and whether those effects recur.
Final OPUC decisions on the 2011 rate case, the 2009 SB 408 refund (PGE continued to record $13m despite filing a revised $2m refund estimate), and the integrated resource plan.
Boardman emissions-control requirements, projected capital costs, operating-life decision, and potential EPA or private-party liabilities.
Whether lower retail demand, hydro generation, or wholesale prices affect future margins, power costs, and cash generation.
Collateral requirements and available liquidity under adverse commodity-market or credit-rating scenarios, alongside the substantial planned capital program and debt maturities.