Business Context and Reporting Period
Company: Portland General Electric Company (PGE)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: PGE is a vertically integrated, cost-based regulated electric utility operating exclusively in Oregon. It generates, purchases, transmits, distributes, and sells electricity to approximately 810,000 retail customers. The company operates as a single segment and is subject to regulation by the Public Utility Commission of Oregon (OPUC) and the Federal Energy Regulatory Commission (FERC).
Key Financial Metrics
| Metric | 2008 | 2007 | 2006 |
|---|---|---|---|
| Total Revenues | $1,745 million | $1,743 million | $1,520 million |
| Income from Operations | $217 million | $269 million | $159 million |
| Net Income | $87 million | $145 million | $71 million |
| Earnings Per Share (Diluted) | $1.39 | $2.33 | $1.14 |
| Operating Cash Flow | $183 million | $344 million | $106 million |
| Capital Expenditures | $383 million | $455 million | $371 million |
| Total Assets | $5,023 million | $4,108 million | $3,767 million |
| Total Long-Term Debt | $1,306 million | $1,313 million | $1,003 million |
| Common Equity Ratio | 47.3% | 50.0% | 53.0% |
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased 40% to $87 million in 2008 compared to $145 million in 2007. This was primarily driven by a $20 million after-tax provision for a future refund to customers related to the Trojan Nuclear Plant investment recovery order, a $17 million negative impact from Oregon Senate Bill 408 (income tax treatment), and a $15 million decrease due to the decline in fair market value of non-qualified benefit plan trust assets.
- Revenue Stability: Total revenues remained flat at $1,745 million, despite a $33 million reduction in revenue due to the Trojan refund accrual. This was offset by a 2% increase in average retail prices and a 2% increase in retail energy deliveries driven by more extreme weather conditions.
- Working Capital: The company reported negative working capital of $279 million in 2008, a significant shift from positive working capital of $147 million in 2007. This was primarily caused by a $350 million increase in net liabilities from price risk management activities (mark-to-market adjustments on derivatives) classified as current liabilities.
- Margin Deposits: Due to declining wholesale power and natural gas prices, PGE was required to post increased collateral (margin deposits) with counterparties, rising from $28 million in 2007 to $189 million in 2008.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Rate Case: The OPUC approved a 7.3% average price increase effective January 1, 2009, though customer credits reduced the net increase to approximately 5.6%. The approved return on equity is 10.1%.
- Capital Requirements: PGE projects capital expenditures of $722 million in 2009 and $526 million in 2010. Major projects include Biglow Canyon Wind Farm Phases II and III, hydro relicensing, and a smart meter project.
- Financing: The company anticipates issuing approximately $675 million of debt and $175 million to $200 million of equity in 2009-2010. In January 2009, PGE issued $130 million of First Mortgage Bonds.
- Hydro Conditions: Forecasts indicate below-normal regional hydro conditions for 2009, which may increase power purchase costs.
Risks and Contingencies
- Trojan Nuclear Plant Litigation: The OPUC ordered a $33.1 million refund to customers regarding the recovery of the Trojan investment. This order is under appeal by the Utility Reform Project (URP) and class action plaintiffs. While management believes this will not materially impact financial condition, it may impact future results of operations and cash flows.
- Environmental Compliance: The Oregon Department of Environmental Quality (DEQ) proposed a plan requiring emission controls at the Boardman coal plant to address regional haze. Estimated costs range from $575 million to $636 million. PGE is evaluating alternatives and the economic prudence of these expenditures.
- Market and Credit Risk: Volatile capital markets have increased the cost of capital. S&P revised PGE's credit outlook from "stable" to "negative" in January 2009. A downgrade to below investment grade could trigger additional collateral requirements of approximately $151 million to $215 million.
- Superfund Sites: PGE is a Potentially Responsible Party (PRP) at the Portland Harbor and Harbor Oil sites. Remediation costs are uncertain but could materially impact future cash flows.
Investor Verification Checklist
- Trojan Refund Status: Verify the final outcome of the appeals regarding the $33.1 million Trojan refund and the timing of any payments to customers.
- Boardman Emission Costs: Monitor the final rule adoption by the Oregon Environmental Quality Commission (OEQC) regarding the Boardman plant emission controls and the final cost estimates.
- Capital Market Access: Track PGE's ability to issue the projected $675 million in debt and equity in 2009-2010 given the "negative" credit outlook and tight credit markets.
- Margin Deposit Fluctuations: Monitor the level of margin deposits required by counterparties, as further declines in commodity prices could strain liquidity.
- Hydro Production: Assess the impact of below-normal hydro conditions in 2009 on net variable power costs (NVPC) and the potential for customer price adjustments under the Power Cost Adjustment Mechanism (PCAM).