Portland General Electric Company — 2010 Form 10-K
Business and period. PGE is a vertically integrated, Oregon-regulated electric utility serving 820,676 retail customers at December 31, 2010. This annual filing covers the year ended December 31, 2010; quarterly figures below include the fourth quarter. Amounts are in U.S. dollars.
Financial performance and position
| Metric | 2010 | 2009 |
|---|---|---|
| Revenue | $1.783 billion | $1.804 billion |
| Gross margin | $954 million; 54% of revenue | $860 million; 48% |
| Operating income | $267 million | $208 million |
| Net income attributable to PGE | $125 million; $1.66 diluted EPS | $95 million; $1.31 diluted EPS |
| Operating cash flow | $391 million | $386 million |
| Capital expenditures | $450 million | $696 million |
| Long-term debt | $1.808 billion | $1.744 billion |
| Cash and cash equivalents, year-end | $4 million | $31 million |
| Total assets / PGE shareholders’ equity, year-end | $5.491 billion / $1.592 billion | $5.172 billion / $1.542 billion |
Retail revenue was $1.664 billion, slightly above 2009, while wholesale revenue fell 22% to $87 million. Retail electricity deliveries declined 3.1% overall (1.4% weather-adjusted); residential and commercial deliveries fell, while industrial deliveries increased 3.3%. Purchased-power and fuel expense fell 12% to $829 million, and average variable power cost decreased to $38.68/MWh from $43.22/MWh. The improved margin and earnings reflected stronger plant availability, lower relative gas prices, and absence of certain 2009 charges, partly offset by lower retail use and wholesale sales.
Fourth-quarter 2010 revenue was $455 million, attributable net income was $25 million, and diluted EPS was $0.34, versus $485 million, $8 million, and $0.11, respectively, in fourth-quarter 2009. The 2010 quarter included reversal of a previously estimated $24 million SB 408 customer collection.
Current assets were $661 million and current liabilities $489 million at year-end. PGE reported $19 million of commercial paper outstanding, no revolving-credit borrowings, and $372 million of unused credit under $600 million in revolving facilities. The credit-agreement debt ratio was 53.4%, below the 65% covenant limit. The common-equity ratio was 46.7%. The filing reports no long-term variable-rate debt outstanding.
Changes, outlook, and management commentary
- Attributable net income rose 32% from 2009, while revenue declined about 1%. Gross margin expanded to 54% from 48%, principally as power-supply operations improved and purchased-power costs decreased.
- Generation capacity increased with completion of Biglow Canyon Phase III; the wind farm reached approximately 450 MW and total project cost was $960 million. Capital expenditures declined from 2009’s build-out peak.
- The OPUC’s 2011 rate-case order authorized an estimated $65 million revenue increase, including a $35 million reduction in forecast power costs, for an approximate 3.9% overall customer-price increase effective January 1, 2011. It set a 10.0% authorized ROE, continued decoupling through 2013, and revised the PCAM deadband.
- Management forecast 2011 weather-adjusted retail deliveries to be flat, operating cash flow of approximately $500 million, and capital expenditures of approximately $310 million. The cash-flow estimate includes an expected return of $33 million in margin deposits and depends on energy prices and contract settlement timing. Management expected regional hydro conditions to be approximately normal.
- Boardman’s revised Oregon emissions rules require controls and coal-fired operations to cease no later than December 31, 2020, subject to EPA approval. Estimated control costs are approximately $60 million. PGE expects to seek recovery of remaining plant investment, controls, closure costs, and replacement capacity through customer rates; recovery is not assured.
Risks, contingencies, and unusual items
- Results and liquidity depend materially on regulatory decisions about cost recovery, customer rates, power costs, income-tax adjustments, and major capital projects. PGE’s PCAM leaves the company exposed to costs within the deadband and does not assure full recovery outside it.
- Weak regional economic conditions, weather, hydro and wind variability, generating-plant outages, wholesale power and fuel prices, collateral requirements, and access to capital could affect earnings and cash flow. PGE reported $263 million of posted collateral at year-end; a below-investment-grade downgrade could prompt additional collateral requests.
- Pending matters include Trojan-related appeals and class actions seeking $260 million plus interest, a Pacific Northwest wholesale-market refund proceeding with no estimable loss range, and Portland Harbor and Harbor Oil environmental investigations with no estimable remediation exposure.
- Boardman faces Sierra Club litigation and an EPA Notice of Violation alleging Clean Air Act violations. The complaint estimates potential penalties of approximately $60 million; the EPA notice does not specify proposed penalties, and management could not estimate a loss range. Management says it intends to defend the claims.
- Oregon SB 408 treatment remains uncertain. PGE recorded an $8 million estimated refund for 2009, challenged by an intervenor seeking $61 million. No amount was recorded for 2010; the estimated possible collection ranged from less than $1 million to $33 million under differing rules.
- The pension plan remained underfunded by $77 million at year-end, despite improvement from $85 million in 2009; PGE contributed $30 million in 2010 and expected no contribution in 2011. The filing also reports a $4 million impairment loss on a solar facility in 2010.
Deloitte & Touche issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Investor verification priorities
- Track OPUC rulings on the 2009 and 2010 SB 408 calculations and the resulting customer refunds or collections.
- Review outcomes and potential financial exposure from Boardman litigation, the EPA notice, and approval and implementation of emissions rules.
- Assess the status, estimated cost, funding plan, and regulatory recovery prospects for planned capital projects, including Cascade Crossing and replacement resources.
- Validate the 2011 cash-flow and capital-spending outlook, including the assumed $33 million margin-deposit return and available liquidity.
- Monitor resolution of Trojan-related claims, the Pacific Northwest refund proceeding, and Portland Harbor and Harbor Oil investigations.