Business Context and Reporting Period
Company: Portland General Electric Company (PGE)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: PGE is a vertically integrated electric utility serving approximately 814,000 retail customers in Oregon. The company generates, purchases, transmits, distributes, and sells electricity and natural gas. It operates as a single segment with headquarters in Portland, Oregon.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended Sep 30, 2008 | 3 Months Ended Sep 30, 2007 | 9 Months Ended Sep 30, 2008 | 9 Months Ended Sep 30, 2007 |
|---|---|---|---|---|
| Revenues, Net | $400 | $435 | $1,296 | $1,273 |
| Net Income | $0 | $20 | $67 | $121 |
| Earnings Per Share (Diluted) | $0.00 | $0.32 | $1.08 | $1.93 |
| Operating Cash Flow | N/A | N/A | $222 | $291 |
| Capital Expenditures | N/A | N/A | ($281) | ($351) |
| Cash and Equivalents | $5 | $60 | $5 | $60 |
| Total Debt (Current + Long-term) | $1,306 | $1,313 | $1,306 | $1,313 |
Note: Total Debt calculated as Current portion of long-term debt ($142M) + Long-term debt ($1,164M) + Short-term borrowings ($38M) as of Sep 30, 2008.
Material Changes vs. Prior Period
- Net Income Decline: Net income for the third quarter of 2008 was $0 compared to $20 million in the same period in 2007. For the nine-month period, net income fell to $67 million from $121 million.
- Primary Driver: A $33.1 million regulatory liability was recorded in Q3 2008 for a refund to customers ordered by the Oregon Public Utility Commission (OPUC) regarding the Trojan Nuclear Plant investment recovery. This reduced revenues and net income significantly.
- Secondary Drivers: Increased provisions for customer refunds under Oregon Senate Bill 408 (SB 408) and a decline in the fair market value of non-qualified benefit plan trust assets.
- Revenue Fluctuation: Total revenues decreased 8% in Q3 2008 due to the Trojan refund accrual. However, underlying retail energy deliveries increased 3% year-over-year due to customer growth and weather conditions.
- Expense Trends: Purchased power and fuel expenses decreased in Q3 2008 due to settled natural gas swap agreements and Power Cost Adjustment Mechanism (PCAM) adjustments, offsetting higher costs for purchased power and natural gas-fired production.
- Liquidity Pressure: Cash and cash equivalents dropped from $73 million at year-end 2007 to $5 million at September 30, 2008. This was driven by a $120 million increase in margin deposits required by wholesale counterparties due to market volatility.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Markets: Management notes that turbulent capital markets in late 2008 have increased the cost of capital and made access more difficult. PGE plans to issue approximately $230 million of equity and $300 million of long-term debt in late 2008 or 2009.
- Rate Case: A general rate case filed in February 2008 is under review. A proposed average price increase of approximately 8.4% to 10% is expected to become effective January 1, 2009, subject to final OPUC approval.
- Energy Deliveries: PGE projects a 1.5% increase in weather-adjusted energy deliveries for 2008 and a 1.9% increase for 2009.
Risks and Contingencies
- Trojan Nuclear Plant Litigation: The OPUC ordered a $33.1 million refund to customers. This order has been appealed by the Utility Reform Project (URP) and class action plaintiffs. While management believes the outcome will not materially impact financial condition, it may impact future results of operations.
- Wholesale Market Refunds: Ongoing proceedings regarding refunds for wholesale energy sales in the Pacific Northwest (2000-2001) remain pending. Management cannot predict the outcome but believes it will not materially impact financial condition.
- Environmental Compliance:
- Boardman Plant: The Oregon DEQ has proposed stringent emission controls (NOx, mercury, sulfur dioxide) with estimated costs ranging from $507 million to $686 million. Final rules are expected in 2009.
- Portland Harbor & Harbor Oil: PGE is a Potentially Responsible Party (PRP) for Superfund sites. Costs for investigation and remediation are currently indeterminable.
- Counterparty Risk: Following the bankruptcy of Lehman Brothers, PGE is reassigning its $55 million share of the credit facility. Management believes this will not impact liquidity.
Investor Verification Checklist
- Trojan Refund Status: Verify the final outcome of the OPUC order and subsequent appeals regarding the $33.1 million refund liability.
- Margin Deposit Requirements: Monitor cash flow impacts from continued volatility in wholesale power and natural gas prices, which drive margin deposit obligations.
- Capital Market Access: Confirm the successful issuance of planned equity ($230M) and debt ($300M) given the deteriorating credit market conditions in late 2008.
- Boardman Emission Costs: Track the finalization of the Oregon DEQ rules for the Boardman coal plant, as costs could exceed $500 million and impact future rate cases.
- Rate Case Finalization: Confirm the final approved rate increase effective January 1, 2009, to assess revenue recovery potential.