Portland General Electric Company (PGE) — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited results. PGE is a vertically integrated electric utility serving Oregon; it reported 828,494 retail customers at quarter-end.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $413 million | $411 million | $892 million | $895 million |
| Operating income | $61 million | $57 million | $149 million | $172 million |
| Net income | $26 million | $22 million | $75 million | $91 million |
| Diluted EPS | $0.34 | $0.29 | $0.99 | $1.21 |
| Gross margin (company-defined) | 62% | 59% | 61% | 59% |
| Operating cash flow | Not separately stated for quarter | $267 million | $279 million |
Q2 earnings improved 18%, primarily on favorable power-supply operations, lower natural-gas prices, and less plant-maintenance expense than in Q2 2011. For the first half, earnings fell 18%, reflecting lower hydro generation, more thermal generation, reduced deliveries, and higher pension costs. First-half retail energy deliveries declined 1%; management attributed this largely to warmer weather, while weather-adjusted deliveries increased 0.7%.
Financial position, cash flow, and capital
- At June 30, cash was $74 million, current assets $728 million, and current liabilities $566 million.
- Total debt was $1.736 billion: $150 million current and $1.586 billion long-term. PGE had no short-term borrowings or commercial paper outstanding and had $555 million of unused credit capacity after $115 million of letters of credit.
- Operating cash flow for the first half was $267 million; capital expenditures were $137 million. Investing cash use was $128 million and financing cash use was $71 million. Cash increased from $6 million to $74 million.
- Management expected approximately $323 million of 2012 capital expenditures and about $476 million of full-year cash from operations, and did not expect to issue debt or equity in 2012. Long-term debt maturities include $100 million in 2012 and $100 million in 2013.
- Quarterly dividend declared was $0.270 per share, versus $0.265 in Q2 2011. The common equity ratio was 49.5%; the credit-agreement debt ratio was 50.5%, below its 65% limit.
Material changes and outlook
- Q2 revenue was nearly flat year over year; first-half revenue decreased less than 1%. First-half total operating expenses increased to $743 million from $723 million, including higher depreciation, administrative costs, and taxes.
- First-half power and fuel expense decreased 3% to $351 million, but thermal generation supplied 25% of retail load versus 19% a year earlier as hydro resources declined. PGE reported first-half actual net variable power costs about $10 million below baseline; management did not expect a 2012 customer refund after applying the regulatory earnings test.
- Management expected weather-adjusted retail deliveries for full-year 2012 to increase approximately in line with the 0.7% year-to-date increase, after energy-efficiency and conservation effects. It forecast 2013 power-cost-related customer prices to decline 1–2%, with an approximately $27 million lower annual revenue requirement than in 2012; the forecast remained subject to update and OPUC finalization.
- PGE’s resource solicitation sought base-load, flexible, and peaking resources; winning bids were expected in late 2012 or early 2013. A separate solicitation for approximately 100 MWa of renewable resources was planned for the second half of 2012. The proposed Cascade Crossing transmission project was estimated at $800 million–$1.0 billion, with a targeted in-service date of late 2016 or early 2017, subject to approvals.
- Moody’s changed its rating outlook to positive from stable; S&P’s outlook was stable. A below-investment-grade downgrade could trigger additional collateral requests. Estimated additional collateral exposure at June 30 was approximately $105 million for a single-agency downgrade or $277 million for a dual-agency downgrade.
Risks, contingencies, and unusual items
- Material uncertainties include Trojan investment recovery and customer-refund litigation, the Pacific Northwest wholesale-market refund proceeding, and environmental matters. Management could not estimate potential losses for these matters; it stated outcomes were not expected to materially affect financial condition but could materially affect future results or cash flows.
- Portland Harbor’s draft cleanup alternatives estimated total site costs of $169 million to $1.8 billion; PGE’s share was undetermined. The EPA was expected to issue a cleanup decision by the end of 2014. PGE also entered a July 2012 consent order for a feasibility study of the Downtown Reach.
- In July 2012, PGE received a notice of intent to sue alleging Clean Air Act violations at Colstrip, in which PGE owns 20% of Units 3 and 4. PGE said it was evaluating the allegations and could not predict the outcome.
- Other uncertainty includes recovery of PGE’s $5.8 million claim related to repurchased revenue bonds held by Lehman Brothers; the amount and timing of any recovery were unknown.
- Boardman’s approved operating-life change from 2040 to 2020 increased depreciation; the 2012 annual revenue requirement for this adjustment was expected to be $13 million. PGE estimated its share of possible Colstrip emissions-control costs at approximately $10 million.
Important facts for investors to verify
- Whether power costs, hydro and wind output, weather, and retail demand develop in line with management’s 2012 expectations.
- Final OPUC decisions on power-cost adjustments, 2013 tariffs, and related customer refunds or collections.
- Capital-spending execution and the timing, approvals, and economics of new resource and transmission projects.
- Developments and potential financial exposure from Trojan, wholesale refund, environmental, and Colstrip proceedings.
- Liquidity and collateral needs if commodity prices move adversely or credit ratings are downgraded.