Business Context and Reporting Period
Company: Portland General Electric Company (PGE)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1999
Ownership: 100% owned by Enron Corp. (42,758,877 shares outstanding)
Operations: PGE is an electric utility providing retail and wholesale energy services in Oregon. The company operates generation, transmission, and distribution facilities.
Key Financial Metrics
| Metric ($ Millions) | Q2 1999 | Q2 1998 | YTD 1999 | YTD 1998 |
|---|---|---|---|---|
| Operating Revenues | 294 | 260 | 593 | 574 |
| Net Income | 26 | 24 | 71 | 61 |
| Income Available for Common Stock | 25 | 24 | 69 | 60 |
| Operating Cash Flow (YTD) | N/A | 114 | 88 | |
| Capital Expenditures (YTD) | N/A | (60) | (68) | |
| Long-Term Debt | N/A | 974 | 951 | |
| Cash & Equivalents | N/A | 5 | 4 |
Margins & Costs:
- Purchased Power & Fuel: $118M (Q2 1999) vs $89M (Q2 1998). Average power cost rose to 15.5 mills/kWh in Q2 1999 from 13.2 mills in 1998.
- Depreciation & Amortization: $40M (Q2 1999) vs $37M (Q2 1998).
- Effective Tax Rate: Approximately 45% of Net Operating Income for Q2 1999.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased $34M (13%) in Q2 1999 compared to Q2 1998. This was driven by a $14M increase in retail revenues (due to 18,000 new customers and 10% higher energy sales) and a $20M increase in wholesale revenues (due to higher trading activity and prices).
- Profitability: Net income rose $2M (8%) in Q2 1999 to $26M. YTD net income increased $10M (16%) to $71M.
- Cost Pressures: Purchased power and fuel expenses surged 33% in Q2 1999 due to higher spot market prices and increased gas costs for company generation. However, YTD fuel costs only rose 3% due to higher hydro generation offsetting price increases.
- Cash Flow: Operating cash flow improved significantly YTD, rising $26M to $114M, driven by decreased payments for power purchases and federal taxes.
Guidance, Outlook, Risks, and Contingencies
Regulatory and Legal Risks
- Trojan Investment Recovery: A critical legal matter involves the recovery of a return on the undepreciated investment in the Trojan generating facility. While the Oregon Court of Appeals previously ruled against PGE, new legislation (House Bill 3220) signed in June 1999 retroactively affirms the OPUC's authority to allow this recovery. PGE has requested the Oregon Supreme Court to vacate the adverse ruling. A referendum to negate this legislation is being pursued by opponents. PGE's after-tax Trojan investment is $161M, generating ~$21M annual revenue.
- Deregulation: New Oregon legislation signed July 23, 1999, mandates direct access for large commercial/industrial customers by Oct 1, 2001, and introduces rate options for residential customers. PGE is evaluating the impact on operations and asset divestiture.
Year 2000 (Y2K) Contingencies
- Readiness: PGE estimates mission-critical internal systems will be Y2K-ready by Jan 1, 2000, with two exceptions (Energy Management System and Interactive Voice Response System) scheduled for completion by late August/September 1999.
- Costs: Estimated total cost is $20-25M, with ~$11M expected in 1999. The OPUC has ordered capitalization of 1999 incremental costs, though rate recovery is deferred.
- Risks: Significant risks remain regarding "Outside Entities" (suppliers, trading partners) and embedded chips. Worst-case scenarios include widespread system failures, service interruptions, and unquantifiable revenue loss.
Asset Sales and Operations
- Colstrip Sale: PGE agreed to sell its 20% interest in the Colstrip power plant for $230.4M, pending regulatory approval. This includes a proposed $23.2M retail rate reduction.
- Hydro Conditions: Regional hydro conditions are significantly above normal (116% of normal runoff), aiding generation costs.
Investor Verification Checklist
- Trojan Litigation Status: Verify the final outcome of the Oregon Supreme Court review regarding the return on Trojan investment, as this impacts $161M in assets and future revenue streams.
- Y2K Implementation: Confirm the successful completion and testing of the Energy Management System and Interactive Voice Response System by their August/September 1999 deadlines.
- Regulatory Approval for Asset Sales: Monitor the status of OPUC and FERC approvals for the Colstrip plant sale and the Columbia County distribution system sale.
- Rate Case Impact: Assess the financial impact of the new Oregon deregulation law on PGE's ability to recover costs and the potential divestiture of generation assets.
- Fuel Cost Volatility: Track wholesale power prices and gas costs, as PGE lacks a fuel adjustment clause, making earnings sensitive to these fluctuations.