Portland General Electric Company — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. PGE is a vertically integrated Oregon electric utility serving approximately 824,817 retail customers. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $439 million | $464 million | $1,334 million | $1,328 million |
| Operating income | $68 million | $90 million | $240 million | $208 million |
| Net income attributable to PGE | $27 million | $49 million | $118 million | $100 million |
| Diluted EPS | $0.36 | $0.65 | $1.57 | $1.32 |
| Gross margin | 59% | 56% | 59% | 54% |
| Operating cash flow | Not separately provided for the quarter | $399 million | $317 million |
Gross margin is a non-GAAP measure defined by PGE as revenue less purchased power and fuel expense. Nine-month revenue was nearly flat, while operating income and net income rose. Quarterly earnings fell substantially year over year.
For the first nine months, capital expenditures were $215 million; investing cash outflow was $214 million and financing cash outflow was $92 million. Cash increased from $4 million at year-end 2010 to $97 million. At September 30, current assets were $740 million and current liabilities $511 million. Long-term debt was $1.798 billion, with no short-term debt outstanding. PGE reported $511 million of unused credit-facility capacity and a 52.1% debt-to-total-capitalization ratio under credit agreements; its common-equity ratio was 47.9%.
Material changes versus comparable periods
- Q3 earnings: Net income attributable to PGE declined $22 million. Management cited a $20 million prior-year customer collection under the former SB 408 tax mechanism (reversed in Q4 2010), a $4 million loss on non-qualified benefit-plan assets versus a prior-year gain, and higher operating costs.
- Nine-month earnings: Net income attributable to PGE increased $18 million. Lower average variable power costs, higher retail deliveries, and higher customer prices more than offset increased maintenance and other costs and the absence of certain 2010 regulatory collections.
- Power costs and demand: Average variable power cost declined 12% in Q3 and 13% for the nine-month period. Weather-adjusted retail deliveries grew 0.7% in Q3 and 2.0% year to date; total nine-month retail deliveries increased 4.4%.
- Generation mix: PGE plants supplied 39% of retail load for the first nine months, versus 64% in the prior-year period, as lower-cost market purchases displaced thermal generation. Above-normal hydro generation and increased wind output also reduced power costs.
- Costs: Nine-month production and distribution expense rose 16%, and administrative and other expense rose 13%, driven mainly by planned plant maintenance, delivery-system costs, incentive compensation, pension costs, and higher receivable write-offs.
Outlook, management commentary, and risks
- PGE projected 2011 weather-adjusted retail deliveries approximately 1.5% above 2010, or approximately 0.6% higher excluding certain paper-production customers. The filing does not provide full-year earnings guidance.
- 2011 capital expenditures were expected to be approximately $304 million, funded from operating cash flow; PGE did not expect to issue long-term debt in 2011. Estimated annual capital spending for 2012–2015 ranged from $255 million to $293 million, excluding potential major resource and transmission projects.
- Lower-than-baseline net variable power costs led PGE to record an estimated $17 million customer refund under the power cost adjustment mechanism (PCAM) at September 30. Management expected 2011 hydro generation to exceed normal.
- The OPUC’s 2012 power-cost update order indicated an estimated 1% decrease in customer prices, subject to finalization; new prices were scheduled to take effect January 1, 2012. The 2011 general rate case had increased annual revenue by $65 million, including a 3.9% overall customer-price increase.
- PGE plans to issue resource requests for proposals in 2012. It also continued permitting and planning for the proposed Cascade Crossing transmission line, estimated at $800 million to $1.0 billion, with a potential 2016–2017 in-service date. These projects remain subject to approvals and competitive processes.
- Boardman coal-fired operations are planned to cease by the end of 2020. A revised decommissioning study increased the related asset-retirement obligation by approximately $23 million; the change was non-cash. Boardman emissions-control spending was estimated at approximately $60 million in total company-wide costs, excluding allowance for funds used during construction.
- Key contingencies include Trojan investment recovery and customer claims, possible refunds in the Pacific Northwest wholesale-market proceeding, and environmental investigations at Portland Harbor and Harbor Oil. PGE could not estimate potential losses; management said these matters were not expected to materially affect financial condition but could materially affect future results or cash flows.
- Market and operating risks include regulatory decisions, weak economic conditions, weather and hydro variability, plant outages and fuel availability, wholesale power and gas price volatility, environmental requirements, capital-market access, and collateral demands. A below-investment-grade downgrade could trigger additional collateral requests; estimated potential incremental collateral was approximately $130 million after a single-agency downgrade or $312 million after a dual-agency downgrade at September 30.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material change in risk factors from the 2010 Form 10-K.
Important facts for investors to verify
- Whether lower power costs and favorable hydro conditions persist, and how PCAM refunds or collections affect future customer prices and earnings.
- Whether the projected 2011 delivery growth and $304 million capital-spending plan were achieved, and the funding needs for future capital projects and debt maturities.
- Final 2012 customer-price changes and regulatory treatment of Boardman costs, emissions controls, and the planned 2020 operating shutdown.
- Developments, potential liabilities, and timing in the Trojan, Pacific Northwest refund, and environmental proceedings, for which PGE could not estimate a loss range.
- Credit ratings, available liquidity, and potential collateral exposure under wholesale contracts if ratings or commodity-market conditions deteriorate.