Business Context and Reporting Period
Company: Portland General Electric Company (PGE)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1998
Ownership: 100% owned by Enron Corp. (42,758,877 shares outstanding)
Business Overview: PGE is a regulated electric utility operating in Oregon. The reporting period reflects the impact of transferring wholesale trading activities to a non-regulated affiliate and ongoing regulatory proceedings regarding the Trojan Nuclear Plant investment.
Key Financial Metrics
| Metric (Millions) | 3 Months Ended June 30, 1998 |
6 Months Ended June 30, 1998 |
|---|---|---|
| Operating Revenues | $260 | $574 |
| Net Income | $24 | $61 |
| Income Available for Common Stock | $24 | $60 |
| Net Cash from Operating Activities | N/A | $88 |
| Capital Expenditures | N/A | ($68) |
| Cash and Equivalents (Ending) | $13 | $13 |
| Long-Term Obligations | $1,023 | $1,023 |
| Common Stock Equity | $954 | $954 |
Note: Operating margins declined due to lower margins on electricity sales and higher operating costs. Purchased power prices increased to an average of 14.1 mills/kWh for the quarter compared to 12.2 mills in 1997.
Material Changes vs. Prior Period
- Revenue Decline: Operating revenues decreased $47 million for the quarter and $101 million for the six months compared to 1997. This was primarily driven by the transfer of wholesale trading activities to a non-regulated affiliate, causing wholesale revenues to drop significantly.
- Earnings Reduction: Net income fell to $24 million for the quarter (from $28 million in 1997) and $61 million for the six months (from $76 million in 1997). Reduced earnings were attributed to lower margins on electricity sales and higher operating expenses.
- Cost Structure: Energy purchases declined 53% for the quarter due to reduced wholesale activity, saving $39 million in power costs. However, average purchased power prices rose. Operating expenses (excluding variable power) increased $11 million for the six months due to January ice storm repair costs and higher administrative expenses.
- Generation Mix: Due to rising purchased power prices, PGE increased its own generation by 72% for the quarter and 65% for the six months to meet power needs.
Guidance, Outlook, and Risks
Regulatory and Legal Risks
- Trojan Investment Recovery: On June 24, 1998, the Oregon Court of Appeals ruled that the Oregon Public Utility Commission (OPUC) lacks authority to allow PGE to recover a return on its undepreciated investment in the Trojan generating facility, though recovery of the investment principal was upheld. PGE is currently collecting ~$23 million annually in return on this investment. Both PGE and the OPUC plan to appeal to the Oregon Supreme Court. Management believes the outcome will not materially impact financial condition but may impact future operating results.
- Customer Choice Proposal: PGE filed a proposal for full customer choice by Q1 1999, which would restructure PGE into a regulated transmission/distribution company. The OPUC staff has disagreed with the full choice proposal, recommending a "portfolio model" instead. PGE expects to file a response in August 1998.
Operational Outlook
- Retail Growth: Weather-adjusted retail energy sales grew 2.1% for the six months ended June 30, 1998. PGE expects 1998 retail sales growth of approximately 2.2% over 1997.
- Power Supply: Regional hydro conditions are below normal (94% of normal runoff projected), potentially reducing water availability for generation in the fall and winter.
- Year 2000 (Y2K): PGE is implementing a remediation plan with an estimated cost that is not expected to be material (approx. $3 million expended to date). However, risks remain regarding "Outside Systems" (suppliers/partners) which PGE cannot control.
- Accounting Standards: PGE has not yet quantified the impact of SFAS No. 133 (Derivatives), effective in 1999.
Investor Verification Checklist
- Trojan Appeal Outcome: Monitor the Oregon Supreme Court's decision on the return on investment for the Trojan plant, as this affects future revenue streams of ~$23 million annually.
- OPUC Restructuring Decision: Verify the final ruling on the "Customer Choice" proposal and the "portfolio model," as this dictates PGE's future business model and asset sales.
- Wholesale Transition: Confirm the financial performance of the non-regulated affiliate that absorbed PGE's wholesale trading activities.
- Hydro Conditions: Track regional precipitation and runoff data to assess potential fuel cost increases or generation shortfalls in late 1998.
- Y2K Remediation: Review progress on the Year 2000 plan, specifically regarding the readiness of critical external suppliers and trading partners.