Portland General Electric Company — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Interim financial statements are unaudited. PGE is a vertically integrated Oregon electric utility and reports as a single segment; it served 821,193 retail customers at quarter-end. Results are seasonal and may not indicate full-year performance.
Financial results and liquidity
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Revenue | $484 million | $449 million; up 8% |
| Gross margin (revenue less purchased power and fuel; non-GAAP) | $290 million; 60% of revenue | $225 million; 50% |
| Operating income | $115 million | $61 million |
| Net income | $69 million | $27 million |
| Diluted EPS | $0.92 | $0.36 |
| Operating cash flow | $146 million | $68 million |
| Capital expenditures | $69 million | $92 million |
- Net income rose $42 million, primarily due to 10% higher retail energy deliveries and a 19% lower average variable power cost. Colder weather, industrial customer demand, improved hydro output, lower wholesale power prices, and the January 2011 rate increase contributed.
- Purchased power and fuel expense fell 13% to $194 million. Total system load increased 6%, but average variable power cost declined to $33.94/MWh from $41.65/MWh.
- Cash and cash equivalents were $27 million at March 31, versus $4 million at December 31, 2010. Current assets were $689 million and current liabilities $447 million.
- Long-term debt was $1.798 billion; there was no short-term debt at quarter-end. PGE retired $10 million of bonds during the quarter. Total liabilities were $3.890 billion and equity was $1.645 billion.
- Credit facilities totaled $600 million, with $453 million unused after letters of credit. PGE reported a 52.3% debt ratio against a 65% covenant limit; its common equity ratio was 47.8%.
- Quarterly dividend declared was $0.26 per share, compared with $0.255 in Q1 2010.
Material changes and operating developments
- Retail energy deliveries increased 10% year over year; weather-adjusted retail deliveries rose 3.1%. Average retail customer count increased by about 4,100.
- Hydro energy from PGE-owned and mid-Columbia resources increased 40% and supplied about 26% of retail load, versus 20% a year earlier. PGE’s own generation supplied 42% of retail load, versus 68%; lower-cost hydro and market purchases displaced thermal generation.
- Operating expenses excluding purchased power and fuel increased to $175 million from $164 million, including higher distribution maintenance, incentive compensation, pension, and IT costs.
- Operating cash flow improved by $78 million, reflecting higher earnings, lower margin-deposit requirements, and an $8 million income-tax refund. Financing cash flow was a $53 million use, including debt repayments and dividends.
Outlook, management commentary, and risks
- Management projected 2011 weather-adjusted retail deliveries about 1% above 2010 and approximately $328 million of capital and preliminary engineering expenditures. PGE expected to fund 2011 requirements from operating cash flow and did not anticipate issuing long-term debt or equity that year.
- PGE planned up to three resource solicitations: flexible and seasonal peaking capacity, renewable resources, and baseload resources. Potential future projects, including Cascade Crossing, are not included in the stated capital forecast; Cascade Crossing was estimated at $800 million to $1.0 billion, with a targeted 2015 in-service date.
- Hydro conditions were expected to be above normal for 2011. Under the power cost adjustment mechanism, PGE estimated a $4 million customer refund for Q1; management estimated full-year net variable power costs could be below the baseline and lower deadband threshold.
- Oregon regulators approved a rate-case change effective January 1, 2011, described as a $65 million annual revenue increase, including a $35 million reduction in net variable power costs, and an approximate 3.9% overall customer-price increase. PGE separately sought recovery of Boardman-related depreciation and decommissioning costs, estimating about $8 million of incremental revenue requirement for the second half of 2011.
- A Boardman decommissioning study increased the plant asset-retirement obligation by approximately $23 million, with a corresponding increase to plant cost. Revised Oregon rules contemplate ending coal-fired operations at Boardman by 2020, subject to EPA approval. Planned emissions controls were estimated at about $60 million; proposed federal air rules could require additional controls.
- Material contingencies include Trojan-related appeals and class actions seeking $260 million plus interest; Boardman environmental litigation and an EPA notice of violation, with a stated potential penalty estimate up to approximately $60 million; and Pacific Northwest power-refund and Portland Harbor/Harbor Oil environmental matters for which PGE could not estimate potential losses. Management said some matters could materially affect future-period earnings or cash flows, while not expecting a material adverse effect on financial condition.
- PGE stated that a downgrade below investment grade could prompt additional collateral demands. Estimated additional collateral following a single-agency downgrade was about $125 million at quarter-end; a dual-agency downgrade could prompt about $246 million. Investment-grade ratings had stable outlooks.
- The Turlock/Boardman outage dispute was settled in Q1 2011 without material adverse impact. Management reported no material changes to the risk factors or market risks described in the prior annual report.
Important facts for investors to verify
- Whether improved hydro conditions, wholesale power prices, and customer demand persist, and how they affect full-year net variable power costs and PCAM refunds.
- Final regulatory treatment and customer-price effects for Boardman’s shortened operating life, emissions controls, and the pending EPA rules.
- Developments and potential financial exposure in the Trojan, Boardman, Pacific Northwest refund, and environmental proceedings; several outcomes and loss ranges remain uncertain.
- Whether operating cash flow is sufficient for the forecast capital program and scheduled debt maturities, especially if planned resource solicitations lead to company-built projects.
- Collateral needs under commodity contracts if market prices or PGE’s credit ratings change.