Business Context and Reporting Period
Company: Portland General Electric Company (PGE)
Reporting Period: Fiscal Year Ended December 31, 1997
Ownership Status: As of July 1, 1997, PGE became a wholly-owned subsidiary of Enron Corp. following the merger of its former parent, Portland General Corporation, with Enron.
Operations: PGE generates, purchases, transmits, distributes, and sells electricity in Oregon and to wholesale customers in the western United States. It serves approximately 685,000 customers in a 3,170 square mile service area.
Key Financial Metrics
| Metric ($ Millions) | 1997 | 1996 | 1995 |
|---|---|---|---|
| Total Operating Revenues | $1,416 | $1,110 | $982 |
| Net Operating Income | $208 | $230 | $201 |
| Net Income | $126 | $156 | $93 |
| Income Available for Common Stock | $124 | $153 | $83 |
| Total Assets | $3,256 | $3,398 | $3,246 |
| Long-Term Obligations | $1,038 | $963 | $931 |
| Cash Provided by Operating Activities | $359 | $369 | $285 |
| Capital Expenditures | ($180) | ($200) | ($234) |
Revenue Composition (1997): Retail revenues totaled $898 million (63% of total), while wholesale revenues reached a record $497 million (35% of total).
Profitability: Net income decreased 10% from 1996, primarily due to a $14 million non-recurring loss provision for non-utility property and increased purchased power costs.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 28% ($306 million) compared to 1996. This was driven by a 156% surge in wholesale revenues ($303 million increase) due to favorable market conditions and increased trading volume.
- Cost Increases: Purchased power and fuel costs rose 119% ($367 million) to $675 million. Average power costs increased to 16.2 mills/kWh from 13.8 mills/kWh in 1996 due to tight market conditions and higher gas prices.
- Retail Performance: Retail revenues declined slightly ($8 million) despite a 5.7% growth in weather-adjusted sales, due to a $70 million annual rate reduction implemented in December 1996.
- Customer Base: PGE added over 17,000 new customers in 1997, contributing to residential sales growth.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Customer Choice Proposal: PGE filed a proposal with the Oregon Public Utility Commission (OPUC) to implement retail competition by January 1, 1999. If approved, PGE would sell its generating assets (approx. 27% of total assets) and transition to a regulated transmission and distribution company. The company seeks full recovery of "transition costs" through rates.
- Wholesale Market: Management expects future wholesale revenues to decline due to increasing volatility and reduced margins. Long-term wholesale marketing activities have been transferred to non-regulated affiliates.
- Capital Expenditures: Expected to remain approximately $170 million annually, focused on distribution system upgrades to support customer growth. No new generating resources are anticipated in the foreseeable future.
Risks and Contingencies
- Regulatory Risk (Trojan): Legal challenges exist regarding the recovery of the Trojan nuclear plant investment and decommissioning costs. A 1996 circuit court ruling contradicted a 1994 ruling, and the case is pending appeal. Management believes recovery will be upheld, but a negative outcome could require a write-off of regulatory assets.
- Environmental/Salmon Runs: Federal restrictions on water flow for salmon restoration on the Columbia and Snake rivers could reduce hydroelectric generation availability and increase purchased power costs.
- Hydro Relicensing: PGE's hydroelectric licenses expire between 2001 and 2006. Relicensing involves significant costs and environmental scrutiny, with no assurance of renewal.
- Year 2000: PGE is assessing the impact of the Year 2000 date change on its systems, expecting remediation completion by mid-1999 with no material effect on operations.
Investor Verification Checklist
- Regulatory Approval: Verify the status of the OPUC's decision on the "Customer Choice" proposal and the potential sale of generating assets.
- Trojan Litigation: Monitor the outcome of the Oregon Court of Appeals regarding the recovery of Trojan investment and decommissioning costs.
- Wholesale Margin Trends: Assess the impact of increased competition and volatility on future wholesale revenue projections.
- Power Supply Costs: Track the cost of purchased power and the impact of hydro conditions and salmon restoration mandates on operating margins.
- Dividend Restrictions: Note that PGE is restricted from paying dividends to Enron if common equity capital falls below 48% of total capitalization.