Business Context and Reporting Period
Company: Portland General Electric Company (PGE)
Reporting Period: Fiscal Year Ended December 31, 1998
Ownership Status: Wholly-owned subsidiary of Enron Corp. (since July 1, 1997).
Operations: PGE generates, purchases, transmits, distributes, and sells electricity in Oregon and to wholesale customers in the western United States. As of year-end 1998, it served approximately 704,000 customers in a service area of 3,170 square miles.
Key Financial Metrics
| Metric ($ Millions) | 1998 | 1997 | 1996 |
|---|---|---|---|
| Total Operating Revenues | $1,176 | $1,416 | $1,110 |
| Net Operating Income | $200 | $208 | $230 |
| Net Income | $137 | $126 | $156 |
| Income Available for Common Stock | $135 | $124 | $153 |
| Total Assets | $3,162 | $3,256 | $3,398 |
| Long-Term Obligations | $981 | $1,038 | $963 |
| Cash Flow from Operations | $265 | $359 | $369 |
| Capital Expenditures | $144 | $180 | $200 |
Liquidity: PGE maintains short-term debt primarily in the form of commercial paper, with monthly balances in 1998 ranging from $96 million to $167 million. It holds committed borrowing facilities of $200 million expiring in July 2000.
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased 17% to $1,176 million from $1,416 million in 1997. This was driven primarily by a 53% drop in wholesale revenues ($234 million vs. $497 million) as PGE limited wholesale activities to system management. Retail revenues remained relatively flat ($901 million vs. $899 million).
- Profitability Improvement: Net income increased 9% to $137 million from $126 million, despite lower revenues. This was aided by a $234 million (35%) decrease in purchased power and fuel costs due to reduced wholesale trading volume.
- Generation Mix: Company generation provided 37% of total power needs in 1998, up from 16% in 1997, as coal and gas-fired generation output nearly tripled.
- Customer Choice Pilot: The one-year Customer Choice pilot program terminated on December 31, 1998. Approximately 8,700 customers (17% of eligible retail customers) had participated, but all returned to PGE at the program's conclusion.
Outlook, Risks, and Management Commentary
Regulatory and Restructuring
The Oregon Public Utility Commission (OPUC) issued an order in January 1999 recommending limited customer choice options but rejected PGE's proposal to sell hydroelectric assets. Implementation is contingent on statutory changes by the Oregon Legislature. PGE expects future wholesale revenues to decline as long-term trading activities are transferred to Enron affiliates.
Asset Transactions
- Colstrip Sale: PGE signed an agreement to sell its 20% interest in the Colstrip coal plant (322 MW) for $230.5 million, subject to regulatory approval expected to take one year.
- Beaver Purchase: PGE exercised an option to purchase combustion turbine generators at the Beaver plant for $37 million upon lease termination in August 1999.
Key Risks and Contingencies
- Trojan Nuclear Decommissioning: Total estimated decommissioning costs are $339 million. A $274 million liability is recorded. An Oregon Court of Appeals ruling in 1998 denied PGE the right to earn a return on its undepreciated Trojan investment, though recovery of the investment itself was upheld. PGE has petitioned the Oregon Supreme Court for review.
- Year 2000 (Y2K): PGE estimates total costs of $20-$25 million to address Y2K issues. While management believes mission-critical systems will be ready, risks remain regarding external dependencies and embedded chips.
- Hydro Relicensing: Eight hydroelectric plants face federal license renewals between 2001 and 2006. Environmental concerns and relicensing costs could impact future operations.
- Salmon Restoration: Operational changes to restore salmon runs may reduce water availability for generation, though impacts were mitigated by favorable hydro conditions in 1998.
Investor Verification Checklist
- Trojan Rate Recovery: Verify the status of the Oregon Supreme Court review regarding the return on undepreciated Trojan investment, as this impacts future earnings.
- Wholesale Revenue Trajectory: Confirm the extent of revenue decline as PGE exits long-term wholesale trading and relies more on retail and system balancing.
- Regulatory Approval for Colstrip Sale: Monitor the timeline for state and federal approval of the $230.5 million asset sale.
- Y2K Implementation Costs: Track actual expenditures against the $20-$25 million estimate and monitor for operational disruptions.
- Hydro Relicensing Outcomes: Assess potential cost increases or operational restrictions associated with the renewal of federal hydro licenses starting in 2001.