Business context and reporting period
Portland General Electric Company (PGE) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. PGE is a vertically integrated electric utility serving approximately 863,000 retail customers in Oregon. Results are seasonal and can vary with weather, power prices, and generation availability.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $484 million | $476 million | $1,399 million | $1,399 million |
| Gross margin | $304 million; 63% | $295 million; 62% | $944 million; 67% | $909 million; 65% |
| Operating income | $64 million | $68 million | $227 million | $225 million |
| Net income | $34 million | $36 million | $132 million | $121 million |
| Diluted EPS | $0.38 | $0.40 | $1.49 | $1.47 |
| Net margin | 7% | 8% | 9% | 9% |
For the nine months, operating cash flow was $497 million, capital expenditures were $454 million, and cash increased by $84 million to $88 million. Dividends paid were $82 million; dividends declared were $0.32 per share in the third quarter.
At September 30, 2016, total assets were $7.455 billion and equity was $2.310 billion. Long-term debt, net of debt expense, was $2.325 billion, with no current portion or short-term borrowings. PGE had $500 million of unused revolving-credit capacity; its debt-to-total-capital ratio under the credit agreement was 51.0%, and its common-equity ratio was 49.3%. The company reported investment-grade ratings with stable outlooks.
Changes versus prior comparable periods
- Third-quarter net income fell $2 million and diluted EPS fell $0.02. Lower retail deliveries and Carty-related costs beyond amounts authorized for recovery contributed; wholesale revenue increased $19 million.
- Nine-month net income rose $11 million despite flat revenue, primarily as purchased power and fuel expense fell $35 million and average variable power cost per MWh declined 8%. Retail energy deliveries decreased 3.4%, including a 10.6% decline in total industrial deliveries.
- Third-quarter retail energy deliveries declined 7.6%, attributed largely to milder comparative weather and reduced commercial and industrial usage. Nine-month total revenue was flat as higher wholesale revenue offset lower retail revenue.
- Long-term debt increased from $2.060 billion at year-end 2015 to $2.325 billion at September 30, 2016. During the nine months, PGE issued $140 million of first mortgage bonds and borrowed $125 million under term loans, while repaying $133 million of debt.
Outlook, management commentary and risks
- Carty: The 440 MW gas plant entered service July 29, 2016. Estimated total cost is $640–$660 million, versus $514 million authorized for recovery in customer prices. PGE is pursuing claims against the contractor and sureties, including a claim seeking more than $200 million from the contractor. Recovery of excess costs from customers is uncertain; PGE recorded no loss because management assessed disallowance as less than probable.
- Capital and liquidity: PGE estimated 2016 capital expenditures of approximately $614 million, excluding AFDC, and operating cash flow of $480–$520 million. It expected to fund requirements with operating cash, debt issuance of up to $290 million, and commercial paper as needed. Management stated available liquidity was adequate for anticipated requirements.
- Rates and power costs: PGE’s updated 2017 power-cost filing indicated a potential $59 million decrease in net variable power costs; the forecast remained subject to updates and OPUC action. The 2016 power-cost adjustment mechanism was forecast within its deadband, with no customer collection or refund expected.
- Resource planning and regulation: PGE expected to file its 2016 Integrated Resource Plan in late 2016. A draft considered renewable additions and additional capacity needs as Boardman is scheduled to cease coal operations by the end of 2020. Oregon’s Clean Electricity and Coal Transition Plan raises renewable portfolio requirements and requires accelerated depreciation of PGE’s Colstrip investment; PGE sought a roughly $6 million annual customer-price adjustment for 2017 related to Colstrip recovery.
- Environmental and legal contingencies: PGE expects to share some Portland Harbor investigation or remediation costs, but cannot reasonably estimate its allocation; costs could be material. The EPA’s proposed cleanup plan estimated total site costs at $746 million, not PGE’s share. Trojan investment recovery class actions remained on appeal. PGE said the Pacific Northwest refund matter was not expected to cause a material loss absent reversal or modification of current rulings.
- Market and operating risks: Commodity-price changes, weather, outages, fuel availability, regulatory decisions, project costs, and credit-rating changes could affect earnings, cash needs, and collateral requirements. A below-investment-grade downgrade could trigger additional collateral demands. PGE reported $38 million of collateral posted and estimated potential additional collateral of about $86 million for a single-agency downgrade or $160 million for a dual-agency downgrade as of September 30.
Important facts for investors to verify
- Progress and final cost of Carty, the outcome of claims against the contractor and sureties, and OPUC treatment of costs above $514 million.
- Whether the projected 2017 power-cost reduction and other tariff changes are approved and reflected in customer prices.
- PGE’s eventual share of Portland Harbor cleanup and natural-resource damages, and the potential outcome of Trojan-related appeals.
- Actual capital spending, operating cash flow, debt issuance, and liquidity needs relative to management’s 2016 estimates.
- How Oregon’s renewable requirements and Boardman and Colstrip plans affect future resource investment, rates, and recovery of costs.