Portland General Electric Company — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. PGE is a vertically integrated electric utility serving Oregon, with 824,780 retail customers at quarter-end. Comparisons are with Q1 2011 unless stated otherwise. Interim results are seasonal and are not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $479 million | $484 million, down 1% |
| Gross margin | $284 million; 59% of revenue | $290 million; 60% |
| Operating income | $88 million; 18% margin | $115 million; 24% margin |
| Net income | $49 million | $69 million, down 29% |
| Diluted EPS | $0.65 | $0.92 |
| Operating cash flow | $110 million | $146 million |
| Capital expenditures | $69 million | $69 million |
| Cash and cash equivalents | $8 million at March 31 | $6 million at December 31, 2011 |
Operating expenses rose to $391 million from $369 million. Purchased power and fuel was $195 million, nearly unchanged, while production and distribution expense increased $11 million to $53 million and depreciation and amortization rose $6 million to $62 million. Interest expense was $28 million versus $27 million. Dividends declared were $0.265 per share, compared with $0.260.
At March 31, total assets were $5.789 billion and total liabilities were $4.094 billion. Long-term debt was $1.735 billion, including $100 million current maturities; short-term debt and commercial paper outstanding were zero. PGE had $533 million of unused credit capacity and a 50.6% debt-to-capital ratio under its credit agreements (65% covenant limit). Common equity was 49.4% of capitalization. Cash provided by operations less capital expenditures was approximately $41 million.
Material changes and operating drivers
- Retail energy deliveries declined 0.8%, mainly due to weaker industrial demand and one paper customer’s closure; the average customer count increased by about 3,700.
- Hydro energy was down 27% year over year, and thermal generation supplied 43% of retail load versus 27% a year earlier. Higher thermal operating costs, lower deliveries, and lower customer prices contributed to lower earnings.
- Average variable power cost increased to $35.49/MWh from $33.94/MWh. Purchased power and fuel expense rose only 1%, as higher unit costs were largely offset by lower system load.
- Production and distribution expense increased 26%, reflecting greater thermal-plant generation and maintenance, higher delivery-system costs, and a $3 million insurance recovery in the prior-year period.
- Operating cash flow fell $36 million, primarily because of lower net income and increased margin-deposit requirements. Investing cash outflow was lower by $12 million, partly due to $10 million proceeds from the sale of a solar facility.
Outlook, risks, and unusual items
- Outlook: Management expected 2012 weather-adjusted retail deliveries to be comparable to 2011; excluding two paper customers, it projected growth of approximately 1%–1.5%. Full-year 2012 operating cash flow was estimated at approximately $478 million and capital expenditures at approximately $334 million. PGE said it did not expect to issue long-term debt or equity in 2012.
- For 2012, net variable power costs were forecast below baseline but within the PCAM deadband; no estimated customer refund was recorded at quarter-end. Actual Q1 costs were about $5 million below baseline.
- Tariff changes effective January 1, 2012 were expected to reduce annual revenue by approximately $26 million overall. These included an estimated $22 million annual reduction from lower forecast power costs, partly offset by the end of customer credits related to Trojan-site tax credits.
- PGE planned competitive solicitations for new capacity and energy resources and approximately 100 MWa of renewable resources. The proposed Cascade Crossing transmission project was estimated at $800 million–$1.0 billion in 2011 dollars; the expected in-service date was late 2016 or early 2017, subject to approvals.
- Boardman coal operations are to cease by December 31, 2020 under revised EPA rules. PGE estimated its share of Boardman emissions-control spending at $11 million in 2012 and $11 million in 2013; its estimated share of potential Colstrip controls was not expected to exceed $10 million.
- Major contingencies include Trojan investment-recovery challenges and customer claims seeking $260 million plus interest; the Pacific Northwest wholesale power refund proceeding; and environmental investigations at Portland Harbor and the Downtown Reach. PGE said it could not estimate potential losses for these matters. Management believed they would not materially affect financial condition, but could materially affect future-period earnings or cash flows.
- Portland Harbor cleanup alternatives in a draft study ranged from $169 million to $1.8 billion, but responsibility and PGE’s share were undetermined. For Harbor Oil, the EPA indicated it intended to recommend no further cleanup action, with a final decision expected in September 2012.
- Commodity-price movements can affect derivative values and collateral needs. At quarter-end, PGE had posted approximately $214 million of collateral; a downgrade below investment grade could prompt additional collateral requests. Estimated additional collateral under a dual-agency downgrade was approximately $339 million at March 31.
Most important facts for investors to verify
- Whether the 2012 earnings decline persists as hydro conditions, thermal generation, power costs, and industrial demand evolve.
- Whether management’s $478 million operating-cash-flow and $334 million capital-spending estimates are achieved, and how margin deposits affect cash availability.
- Progress and cost exposure for Boardman controls, resource solicitations, and Cascade Crossing, including required regulatory and permitting approvals.
- Developments and potential financial exposure in the Trojan, Pacific Northwest refund, and environmental proceedings; several losses remain unquantifiable.
- Credit ratings, counterparty collateral requirements, and available credit capacity, particularly given the company’s derivative liabilities and potential downgrade-related calls.