Business Context and Reporting Period
Company: Portland General Electric Company (PGE)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: PGE is a vertically integrated electric utility engaged in the generation, purchase, transmission, distribution, and retail sale of electricity in Oregon, as well as wholesale sales in the western United States and Canada. The company serves approximately 804,000 retail customers.
Key Financial Metrics
| Metric (in millions, except per share) | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 |
|---|---|---|
| Operating Revenues | $435 | $1,273 |
| Net Income | $20 | $121 |
| Earnings Per Share (Diluted) | $0.32 | $1.93 |
| Net Cash Provided by Operating Activities | N/A | $291 |
| Capital Expenditures | N/A | ($351) |
| Long-Term Debt | $1,238 | $1,238 |
| Cash and Cash Equivalents | $60 | $60 |
| Common Equity Ratio | 51.3% | 51.3% |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 17% ($63 million) for the quarter and 15% ($169 million) for the nine-month period compared to 2006. This was driven by price increases related to fuel costs and the new Port Westward plant, as well as a significant positive impact from Oregon Senate Bill 408 (SB 408).
- Profitability Surge: Net income for the nine months ended September 30, 2007, was $121 million, a substantial increase from $31 million in the same period of 2006. The 2006 results were negatively impacted by a $32 million after-tax cost to replace power from the Boardman plant during an extended outage, which did not recur in 2007.
- Operational Improvements: Generation from company-owned facilities increased significantly (38% for the quarter, 52% of retail load for nine months) due to the return of the Boardman plant to full operation and the addition of the 400 MW Port Westward natural gas plant in June 2007.
- Expense Trends: Purchased power and fuel expenses increased 22% for the quarter and 8% for the nine months, primarily due to higher natural gas prices and hedging costs, partially offset by reduced reliance on wholesale markets.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Projects: PGE is proceeding with the Biglow Canyon Wind Farm (Phase I expected completion end of 2007; Phases II and III by 2009-2010) and an Advanced Metering Infrastructure (AMI) project expected to cost $130-$135 million.
- Rate Cases: The company anticipates filing a general rate case in early 2008 with prices effective January 2009. An Annual Power Cost Update Tariff was submitted for 2008 with expected minimal price changes.
- Dividends: Quarterly dividends declared were $0.235 per share for the third quarter of 2007.
Risks and Contingencies
- Trojan Nuclear Plant Litigation: Ongoing legal challenges regarding the recovery of investment and return on the closed Trojan plant. While management believes there will be no material adverse impact on financial condition, results of operations could be affected in future periods.
- Regulatory Matters: Pending OPUC proceedings regarding SB 408 income tax deferrals and the Port Westward cost recovery. A Ninth Circuit Court decision remanded a FERC proceeding regarding Pacific Northwest wholesale market refunds to FERC for further review.
- Environmental Compliance: Potential significant capital costs ($300-$620 million) to meet regional haze rules and mercury emission standards at the Boardman plant by 2012.
- Market Risk: Exposure to commodity price fluctuations (natural gas, coal) and credit risk from wholesale counterparties, managed through hedging and collateral requirements.
Investor Verification Checklist
- SB 408 Impact: Verify the sustainability of earnings driven by the "double whammy" effect of Oregon's income tax law, which created a $26 million after-tax positive impact in the first nine months of 2007.
- Capital Expenditure Execution: Monitor the progress and cost overruns of the Biglow Canyon Wind Farm and the AMI project, which represent significant future cash outflows.
- Regulatory Outcomes: Track the resolution of the Trojan Investment Recovery litigation and the FERC Pacific Northwest refund proceedings, as these could result in future refunds or earnings adjustments.
- Environmental Costs: Assess the final regulatory requirements for mercury controls at the Boardman plant, as cost estimates range widely ($300M-$620M) and could impact future rate cases.
- Debt Covenants: Confirm continued compliance with the 65% consolidated indebtedness to total capitalization covenant in the revolving credit facility (currently at 48.7%).