POR

Business Context and Reporting Period

Company: Portland General Electric Company (PGE)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: PGE is a vertically integrated electric utility serving approximately 814,000 retail customers in Oregon. The company engages in the generation, purchase, transmission, distribution, and retail sale of electricity, as well as wholesale sales of electricity and natural gas.

Key Financial Metrics

Margins: Operating income margin remained stable at 13% ($63 million operating income on $485 million revenue). The effective tax rate for Q1 2009 was 29.5%.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 3% ($14 million) primarily due to an 8% increase in average retail prices approved by the Oregon Public Utility Commission (OPUC) and collections related to Senate Bill 408. This was partially offset by a 3% decrease in retail energy deliveries due to economic slowdown and a 42% drop in wholesale revenues driven by lower market prices.
• Profitability: Net income attributable to PGE increased 11% ($3 million) to $31 million. This increase was driven by higher prices and SB 408 collections, offset by higher power costs and operating expenses.
• Operating Expenses: Total operating expenses rose 3% to $422 million. Purchased power and fuel expenses increased 2% ($5 million) due to financial contract settlements, despite lower natural gas prices. Depreciation and amortization increased 14% ($7 million) largely due to $7 million in impairment losses on photovoltaic solar facilities.
• Cash Flow: Net cash provided by operating activities decreased significantly by $77 million to $40 million. This decline was primarily due to higher margin deposit requirements ($38 million) resulting from lower power and natural gas prices, and higher payments for power/fuel and storm restoration.
• Financing Activity: The company raised significant capital in Q1 2009, issuing 12.5 million shares of common stock for net proceeds of $170 million and $130 million in long-term debt. These proceeds were used to repay short-term debt and fund capital projects.

Guidance, Outlook, and Risks

Capital Requirements: PGE expects to spend $723 million on capital projects in 2009 and $522 million in 2010. Major projects include Biglow Canyon Wind Farm Phases II and III, a smart meter project, and hydro licensing. The company anticipates issuing approximately $375 million of additional debt through 2010 to fund maturities and projects.

Liquidity: As of March 31, 2009, PGE had $272 million in unused credit facility capacity. However, the company has posted $409 million in collateral (cash and letters of credit) with counterparties due to price risk management activities. Management expects approximately 45% of these deposits to be released by the end of 2009.

Legal and Regulatory Contingencies:

• Trojan Nuclear Plant: PGE is required to refund $33.1 million plus interest to customers following an OPUC order. Refunds are anticipated to begin in late 2009. Related class action lawsuits remain abated pending regulatory resolution.
• Pacific Northwest Refund: The Ninth Circuit Court remanded a refund proceeding to the FERC regarding potential market manipulation in 2000-2001. The outcome is uncertain but could impact future cash flows.
• Environmental: PGE is a Potentially Responsible Party (PRP) for the Portland Harbor and Harbor Oil Superfund sites. While costs are currently deferred for ratemaking, final remediation costs are undetermined.
• Boardman Emissions: The Oregon DEQ proposed a plan requiring emission controls at the Boardman coal plant, with estimated costs between $575 million and $640 million over several phases. PGE is proposing an alternative plan.

Unusual Items: The company recognized $7 million in impairment losses on solar power facilities held by Variable Interest Entities (VIEs). The majority of this loss was attributed to noncontrolling interests.

Investor Verification Checklist

• Collateral Exposure: Verify the impact of commodity price volatility on the $409 million in posted collateral and the potential for additional margin calls if credit ratings are downgraded.
• Trojan Refund Timing: Confirm the schedule and cash flow impact of the $33.1 million customer refund mandated by the OPUC.
• Capital Project Costs: Monitor the progress and cost estimates for the Biglow Canyon Wind Farm and the Boardman emissions controls, which represent significant future capital outlays.
• Regulatory Outcomes: Track the status of the Pacific Northwest Refund proceeding and the FERC investigation into Open Access Transmission Tariff compliance.
• Debt Maturities: Review the company's plan to refinance $186 million of long-term debt maturing in 2010 and the associated interest rate risks.