Business context and reporting period
Portland General Electric Company (PGE) is a vertically integrated Oregon electric utility. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the same periods in 2019. PGE served approximately 904,000 retail customers.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $547 million | $542 million | $1,589 million | $1,575 million |
| Gross margin* | $255 million | $377 million | $1,035 million | $1,126 million |
| Operating income | $(16) million | $88 million | $188 million | $256 million |
| Net income (loss) | $(17) million | $55 million | $103 million | $153 million |
| Diluted EPS | $(0.19) | $0.61 | $1.15 | $1.70 |
*PGE-defined non-GAAP measure: total revenue less purchased power and fuel.
- Revenue and demand: Q3 retail revenue was $477 million versus $456 million. Weather-adjusted retail deliveries rose 4% in Q3; residential and industrial deliveries increased while commercial deliveries declined. For the first nine months, reported retail deliveries were approximately flat year over year.
- Costs and margins: Purchased power and fuel rose 77% to $292 million in Q3 and 23% to $554 million year to date. Q3 average variable power cost was $46.62/MWh versus $25.16/MWh; the filing attributes the increase chiefly to $127 million of realized energy-trading losses. Gross margin fell 32% in Q3 and 8% year to date.
- Cash flow: Nine-month operating cash flow was $442 million, down from $502 million. Capital expenditures were $549 million, versus $407 million, and investing cash outflow was $551 million. Cash ended the period at $253 million, up from $30 million at year-end 2019.
- Debt and liquidity: September 30 long-term debt was $2.817 billion net of unamortized debt expense; the balance sheet also showed $225 million short-term debt and $160 million current long-term debt. Available liquidity was reported as $918 million, including $253 million cash and $665 million unused credit capacity. Debt-to-total capitalization under the credit agreement was 55.5%; common equity ratio was 44.5%.
Material changes versus prior period
- Q3 net income swung to a $17 million loss from $55 million profit; nine-month earnings declined 33% to $103 million.
- The $127 million trading loss drove the sharp Q3 increase in power costs. PGE said the positions were outside acceptable risk tolerances, would not be pursued for regulatory recovery, and no longer created net market exposure.
- Q3 weather-adjusted retail deliveries rose 4%, with pandemic-related shifts toward residential use and weaker commercial demand. PGE estimated full-year 2020 weather-adjusted retail deliveries would increase approximately 1%.
- Capital spending and construction increased, including work on the Wheatridge renewable facility and Integrated Operations Center. Nine-month cash from operations declined while investing outflows increased.
Outlook, commentary, risks and contingencies
- PGE estimated 2020 operating cash flow of $450–$500 million and capital expenditures of $750 million, excluding allowance for funds used during construction. It expected to fund requirements with operating cash, debt issuance of up to $450 million, and commercial paper as needed.
- The company’s stated strategy includes average diluted EPS growth guidance of 4–6%; the filing does not provide a clear, specific 2020 EPS forecast.
- Management said it believed liquidity was adequate and COVID-19 would not materially affect 2020 financial condition or cash flows, while warning that market disruption could raise capital costs. COVID-19 increased bad-debt expectations to $15 million for 2020 from an original $6 million forecast; $6 million of bad debt and $2 million of other incremental costs had been deferred at quarter-end, subject to regulatory review.
- Wildfires in Oregon led to $10 million of costs deferred by September 30; the OPUC approved the deferral request on October 20. PGE said it was not aware of fires caused by its equipment and was assessing damage and restoration needs.
- Portland Harbor remediation is a material uncertainty: PGE considers a share of costs probable but cannot reasonably estimate its liability. The EPA’s 2017 remedy was estimated at $1.7 billion for the site; the company expects to seek recovery through an OPUC-approved mechanism, subject to reviews and limitations.
- Three shareholder class actions filed in September and October 2020 allege securities-law misstatements concerning, among other things, trading activity and controls. PGE intends to defend them; it cannot estimate potential losses. The Deschutes River Alliance case remained on appeal, and the company could not predict its outcome.
- The board and management launched reviews of energy-trading controls and oversight after the losses; two employees were placed on administrative leave. Findings and potential consequences were not yet known.
- Credit ratings were investment grade, but S&P’s outlook was negative. A downgrade below investment grade could trigger additional collateral demands; a dual-agency downgrade could have required up to $117 million additional collateral based on September 30 conditions.
Important facts for investors to verify
- Whether independent and board reviews identify control deficiencies, and what remediation or related costs follow.
- How much of the $127 million trading loss is ultimately reflected in earnings and whether any recovery is sought or available.
- Trends in COVID-related customer demand, collections, bad debt, and regulatory deferrals.
- Progress, cost, and regulatory recovery for Wheatridge, the Integrated Operations Center, wildfire restoration, and other capital projects.
- Developments in Portland Harbor allocation and remediation, shareholder litigation, and other legal or regulatory matters.
- Debt maturities, financing needs, credit ratings, collateral requirements, and liquidity as capital spending continues.