POR

Business Context and Reporting Period

Company: Portland General Electric Company (PGE)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: PGE is a vertically integrated electric utility serving approximately 818,000 retail customers in Oregon. The company generates, purchases, transmits, distributes, and sells electricity. It operates as a single segment and is subject to regulation by the Oregon Public Utility Commission (OPUC) and the Federal Energy Regulatory Commission (FERC).

Key Financial Metrics

Note: Operating cash flow and capital expenditures are presented for the nine-month period only as per the Statement of Cash Flows.

Material Changes vs. Prior Period

• Profitability Surge: Net income attributable to PGE increased significantly to $32 million in Q3 2009 from zero in Q3 2008. For the nine-month period, net income rose to $87 million from $67 million. This improvement was driven by higher retail prices, lower employee benefit expenses, and a $20 million favorable impact from a customer refund recorded in 2008 related to Trojan matters.
• Revenue Growth: Revenues increased 11% in Q3 2009 and 2% for the nine-month period compared to 2008. Retail revenues grew due to OPUC-approved price increases effective January 1, 2009, partially offset by a 4% decline in retail energy deliveries due to the economic recession.
• Wholesale Market Decline: Wholesale revenues decreased 41% in Q3 2009 and 44% for the nine-month period, driven by a substantial drop in average wholesale prices for natural gas and electricity.
• Capital Investment: Capital expenditures increased sharply to $544 million for the first nine months of 2009 (up from $281 million in 2008), primarily due to the completion of Biglow Canyon Phase II ($320 million) and ongoing smart meter and transmission projects.
• Debt and Equity: The company issued $170 million of common stock and $430 million of long-term debt in the first nine months of 2009 to fund capital projects and refinance maturing debt.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Energy Deliveries: PGE expects weather-adjusted retail energy deliveries for 2009 to be approximately 2.5% lower than 2008. A modest economic recovery in 2010 is expected to drive a 1.6% increase in deliveries.
• Capital Requirements: Total capital expenditures are estimated at $732 million for 2009 and $545 million for 2010. Major projects include Biglow Canyon Phase III, the smart meter project, and emissions controls at the Boardman coal plant.
• Integrated Resource Plan (IRP): A draft IRP was issued in September 2009, outlining a strategy through 2020 focusing on energy efficiency, new natural gas facilities, and renewable resources to meet Oregon's Renewable Energy Standard.
• Price Adjustments: PGE forecasts an approximate 4% decrease in retail customer prices for 2010 due to lower natural gas and wholesale power costs, partially offset by renewable resource costs. The net impact is estimated at a 1.7% overall price decrease effective January 1, 2010.

Risks and Contingencies

• Trojan Nuclear Plant Litigation: PGE is required to refund $33.1 million (plus interest) to customers regarding the closed Trojan plant. Refunds began in October 2009. Class action lawsuits remain abated pending regulatory resolution.
• Pacific Northwest Refund Proceeding: The Ninth Circuit Court remanded a case regarding potential refunds for wholesale energy sales (2000-2001) to the FERC. PGE has petitioned the U.S. Supreme Court to review the Ninth Circuit's decision. Management believes the outcome will not materially impact financial condition but could affect future results of operations.
• Environmental Remediation: PGE is a Potentially Responsible Party (PRP) for the Portland Harbor and Harbor Oil Superfund sites. Costs for investigation and remediation are currently undeterminable, though management does not expect a material adverse impact on financial condition.
• Plant Outages: Extended maintenance outages at Colstrip Unit 4 and the Boardman coal plant in 2009 increased replacement power costs. Colstrip Unit 4 was expected to return to service by mid-November 2009.
• Regulatory Risk (SB 408): The OPUC denied amortization of a deferral related to income taxes for the period Oct 2005-Dec 2005. Plaintiffs have appealed this decision.

Investor Verification Checklist

• Capital Expenditure Execution: Verify the completion timeline and cost overruns for Biglow Canyon Phase III and the Smart Meter project, which drive the majority of 2009-2010 capex.
• Wholesale Price Exposure: Monitor the impact of continued low natural gas prices on wholesale revenue and the associated margin deposit requirements ($256 million posted as of Sep 30, 2009).
• Regulatory Refunds: Track the execution of the $33.1 million Trojan refund and the status of the Pacific Northwest Refund proceeding, as these represent significant contingent liabilities.
• Boardman Emissions Controls: Review the final cost estimates and regulatory approval for the $520-$560 million emissions control project at the Boardman coal plant required by the Oregon DEQ.
• Debt Maturities: Confirm the refinancing of $186 million in long-term debt maturing in 2010 and the issuance of the $150 million bond expected in November 2009.