PORTLAND GENERAL ELECTRIC CO annual report, FY2011

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Portland General Electric Company — 2011 Form 10-K

Business context and period. This annual report covers the fiscal year ended December 31, 2011; it is not a standalone fourth-quarter filing. PGE is a vertically integrated, Oregon-regulated electric utility serving 822,466 retail customers at year-end. Retail rates are principally set by the Oregon Public Utility Commission (OPUC), and the company supplements its generation with purchased power.

Financial performance and position

  • Revenue: $1.813 billion, up 2% from $1.783 billion in 2010. Retail revenue was $1.722 billion; wholesale revenue fell 31% to $60 million.
  • Earnings: Net income attributable to PGE was $147 million, up 18% from $125 million. Diluted EPS was $1.95 versus $1.66. Income from operations rose to $309 million from $267 million.
  • Margins and power costs: Gross margin, a non-GAAP measure defined as revenue less purchased power and fuel, was $1.053 billion, or 58% of revenue, versus $954 million, or 54%. Purchased power and fuel expense declined 8% to $760 million; average variable power cost fell 9% to $35.15/MWh. PGE recorded an estimated $10 million customer refund under the power-cost adjustment mechanism (PCAM).
  • Demand and supply: Retail deliveries increased 3.3% to 19.345 million MWh; weather-adjusted deliveries rose 1.4%. Company generation supplied about 48% of retail load, versus 64% in 2010, as lower-cost purchased power and stronger hydro output displaced thermal generation.
  • Cash flow and investment: Operating cash flow was $453 million, compared with $391 million. Capital expenditures were $300 million; investing cash use was $299 million. Cash ended the year at $6 million.
  • Debt and liquidity: Long-term debt was $1.735 billion, down from $1.808 billion; year-end short-term debt included $30 million of commercial paper. PGE had $516 million of unused capacity under $670 million of revolving credit facilities. Common equity ratio was 48.6%, compared with 46.7%.
  • Balance sheet and dividends: Total assets were $5.733 billion and PGE shareholders’ equity was $1.663 billion. Declared dividends were $1.055 per share for 2011, versus $1.035 in 2010.

Material changes versus 2010

  • Net income attributable to PGE increased $22 million, reflecting higher retail deliveries and customer prices and lower average variable power costs, partly offset by higher employee-related and operating costs.
  • Retail customer prices rose about 3.9% effective January 1, 2011 under the general rate case; an additional tariff adjustment supported recovery of Boardman costs following its shortened operating life.
  • Retail deliveries rose, supported by cooler heating-season weather, customer growth, and increased industrial demand, including from paper producers. Wholesale sales volumes and prices declined.
  • Operating cash flow improved, while capital spending dropped from $450 million, primarily because Biglow Canyon Phase III construction had been completed in 2010.
  • The pension plan’s underfunded position increased to $147 million from $77 million, mainly reflecting lower discount rates and actuarial losses.

Outlook, risks, contingencies, and unusual items

  • Management outlook: PGE forecast approximately 0.9% growth in 2012 weather-adjusted retail deliveries, including energy efficiency and conservation effects; excluding certain paper customers, it projected 1%–1.5% growth. Management estimated 2012 operating cash flow of about $500 million and capital expenditures of about $328 million, and did not expect to issue debt or equity in 2012.
  • Resource needs: The acknowledged integrated resource plan projected a need for 873 MWa of new resources by 2015 and 1,396 MWa by 2020, including the effect of ending Boardman coal operations by the end of 2020. PGE planned 2012 solicitations for generation and renewable resources. The proposed Cascade Crossing transmission project was estimated at $800 million–$1.0 billion, with a potential late-2016 or early-2017 in-service date; required approvals and project costs remain uncertain.
  • Regulation and power costs: The PCAM only partially protects earnings from power-cost variances. Below-normal hydro was forecast for 2012, and wind output was below the company’s forecast in 2011. Rate recovery of prudent costs is not guaranteed.
  • Environmental requirements: Boardman must cease coal-fired operation by December 31, 2020. PGE estimated its share of Boardman dry sorbent injection costs at $27 million, including allowance for funds used during construction; its expected share of possible Colstrip hazardous-emissions controls was no more than $10 million. Future greenhouse-gas and coal-ash rules could add costs.
  • Legal and environmental contingencies: Trojan-related proceedings include a pending appeal and class-action claims seeking $260 million plus interest; management could not estimate a potential loss range. The Pacific Northwest wholesale-market refund proceeding remains unresolved, with no loss range estimable. Potential liability for Portland Harbor and Harbor Oil remediation also could not be estimated. Management stated these matters were not expected to materially affect financial condition, but could materially affect future-period earnings or cash flows.
  • Liquidity and other risks: A downgrade below investment grade could trigger additional collateral requests; estimated additional collateral was about $142 million for a single-agency downgrade or $337 million for a dual-agency downgrade at year-end. Other material risks include weather, plant outages, commodity prices, capital-market access, pension funding, cyber incidents, and cost-recovery decisions. The Boardman asset-retirement obligation increased by about $20 million following a revised decommissioning estimate.
  • Controls and audit: Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.

Important facts for investors to verify

  • Whether the OPUC approves the estimated 2011 PCAM refund and the timing and amount of any customer refunds.
  • Progress and final cost recovery for Boardman emissions controls, and the schedule and economics of replacement resources as Boardman approaches its 2020 closure.
  • Updates on the Trojan appeals and class claims, the FERC refund proceeding, and Portland Harbor and Harbor Oil investigations; potential losses remain unquantified in the filing.
  • Actual 2012 hydro and wind conditions, retail demand—especially paper-sector load—and realized operating cash flow and capital spending versus management estimates.
  • Available liquidity, collateral requirements, and pension funding needs if credit ratings, energy prices, or capital markets deteriorate.