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Thursday, October 1, 2020

PGE says “ill-conceived” trafficking costs utility at least $ 104 million; stock slides 8.3%

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Portland General Electric said on Monday it suffered a major and potentially growing loss from trading on wholesale electricity markets in the third quarter, causing its annual earnings projection to be cut by up to 47%.

The utility has placed two anonymous employees on administrative leave as its board and a phalanx of outside experts embark on a broader review. Shares of PGE were down 8.3% on overtime trading to $ 38.47.

“Some staff have entered a series of energy exchanges during 2020, with an increase in volume accumulating in the second and third quarters, resulting in significant exposure to the company,” the CEO said Monday. of PGE Maria Pope in an email to employees and filed as part of her communications with securities regulators.

“In short,” wrote Pope, “these trades were badly conceived.”

The company typically makes wholesale energy cost adjustments once a year, adjusting rates to reflect actual versus projected energy costs. This time the company said it will not pursue loss recovery from customers and shareholders will absorb the costs.

PGE claimed to have realized trading losses of $ 104 million as of Aug.24, and was on an additional $ 23 million in unrealized losses from its open positions. Total portfolio losses in the third quarter are estimated to reach $ 155 million based on market conditions, although the company said they may eventually exceed that amount.

The company revised its annual earnings guidance from a previous range of $ 2.20 to $ 2.50 per diluted share to $ 1.30 to $ 1.60 per share.

PGE’s management team appeared last Monday in an effort to reassure employees and investors of its financial integrity. He submitted a voluminous disclosure to the Securities and Exchange Commission, including a lengthy investor presentation, an email to employees, an FAQ, and a press release describing the bevy of lawyers, industry experts and financial advisors he had hired to review. its internal procedures.

What was missing was a precise description of the transactions in question. In an email to employees Monday, Pope offered a general but still ambiguous explanation of the problems.

Pope explained that the market moved against the company when wholesale electricity prices rose in August due to extreme weather conditions, power transmission constraints and changes in the power supply in the west.

“While we don’t have all the answers, a thorough review is underway and we are committed to being transparent,” Pope told employees. “We are committed to getting to the bottom of how it happened and making sure it will never happen again.”

During the period in question, the California Independent System Operator, which operates most of that state’s transmission system, began ordering a series of continuous blackouts in the state, and West Coast wholesale electricity prices rose up to $ 1,000 per megawatt-hour, a level that resembles those seen during the West Coast energy crisis in 2000 and 2001.

The company said it did not expect any layoffs due to the losses and said it would have no impact on customers and communities.

Regulated utilities should not engage in speculative trading to make money with the utility system, said Bob Jenks, executive director of the Oregon Citizens’ Utility Board, a residential taxpayer advocacy group.

“Clearly someone did something that took a lot of risk and wasn’t safe,” he said. “It shouldn’t happen, but the company is talking about it. They are trying to create a steering committee with some independent members. This is a good sign, but from the customer’s point of view, you want a utility that doesn’t take significant risks. “

Modest trading losses and gains are not unusual in any given year and the annual energy cost adjustment mechanism includes a “dead band” in which tariffs are unaffected. But the magnitude of the loss is well outside the $ 30 million downside dead band, and the company’s decision to absorb the costs suggests that operations were outside of its internal policies.

Jenks said that when the company completes its review, the adequacy of the trading activity will eventually be reviewed by the Oregon Public Utility Commission.

Again, PGE did not address the precise nature of its business activities. But last week, the California Independent System Operator also temporarily banned “convergence deals,” a complicated but risky derivatives market in which operators buy and sell electricity one day earlier than they actually need.

Robert McCullough, a Portland-based energy consultant, said those markets can be very attractive to traders when electricity is trading within normal bands, but extremely risky when wholesale energy prices take the kind of swings they have. had recently.

“It’s hard to lose that kind of money in traditional operations,” he said. “Traditionally PGE, aside from its Enron period, is a pretty buttoned-up place. For them to catch the wild swings in the energy market is out of character. “

The company’s board of directors has set up a special committee to review negotiations and internal controls. It also hired two law firms and an external consultant to review its operational and risk management policies, procedures and staff.

Finally, he hired the retired chief risk officer of Excelon Corp. and the energy trading advisory arm of JP Morgan to help with his review and potentially its reach to debt and equity investors and credit rating agencies. credit.

The company said Monday that it continues to have a solid balance sheet and ample liquidity and that its operational and capital budgets for 2020 and 2021 will not be affected.

– Ted Sickinger; tsickinger@oregonian.com; 503-221-8505; @tedsickinger

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