Portland General Electric Company — Q2 2013 Form 10-Q
Business context and reporting period
PGE is a vertically integrated electric utility serving Oregon. This unaudited report covers the three and six months ended June 30, 2013; balance-sheet comparisons are to December 31, 2012. PGE served 833,750 retail customers at quarter-end. Seasonal weather and wholesale power and fuel prices can cause interim results to fluctuate.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $403 million | $413 million | $876 million | $892 million |
| Operating income (loss) | ($11 million) | $61 million | $76 million | $149 million |
| Net income (loss) attributable to PGE | ($22 million) | $26 million | $27 million | $75 million |
| Diluted EPS | ($0.29) | $0.34 | $0.36 | $0.99 |
| Gross margin | $247 million | $257 million | $528 million | $541 million |
- Q2 gross margin was 61% of revenue versus 62%; six-month gross margin was 60% versus 61%.
- Operating cash flow for the first half was $279 million, up from $267 million. Investing cash use was $259 million versus $128 million, primarily reflecting higher capital expenditures. Financing provided $87 million versus cash use of $71 million. Cash ended June at $119 million, compared with $12 million at year-end 2012.
- Capital expenditures were $260 million in the first half versus $137 million. PGE reported estimated 2013 capital requirements of $727 million and expected full-year operating cash flow of $475–$485 million.
- Total long-term debt was $1.736 billion, including current maturities; short-term debt and commercial paper outstanding were zero. PGE had $668 million of unused credit-facility capacity. Its credit-agreement debt ratio was 49.6%, below the 65% limit; common equity was 50.4% of capitalization.
- Current assets were $627 million and current liabilities $435 million at June 30. PGE had $34 million of cash margin deposits and $54 million of letters of credit issued under its facilities.
Material changes versus comparable periods
- Q2 and first-half net income fell substantially year over year. The primary unusual charges were $52 million expensed for the suspended Cascade Crossing project and a $9 million refund to an industrial customer for historical overbilling. The latter was recorded as a second-quarter out-of-period revenue adjustment; management said it was not material to prior reporting periods.
- Q2 revenue declined 2%, with lower retail revenue partly offset by higher wholesale revenue. First-half retail deliveries declined 0.9%; management attributed the weakness largely to warmer weather and one fewer day than in leap-year 2012. Average retail customers increased by about 5,100.
- Production and distribution expense rose $13 million in Q2 and $11 million in the first half, reflecting higher operating, maintenance, overhaul, and repair costs. Lower interest expense partly offset pressure on earnings.
- First-half generation supplied about 53% of retail load versus 44% in 2012, while hydro energy received fell 12%. Actual net variable power costs were below baseline by $14 million for the first half.
Outlook, management commentary, and risks
- Rates: In its 2014 rate case, PGE revised its requested annual revenue increase from $105 million to $79 million, about a 5% customer-price increase. The proposal and stipulations remain subject to Oregon Public Utility Commission approval; a final order was expected in mid-December 2013, with new prices expected January 1, 2014. The proposed settlement includes a 9.75% return on equity and extension of decoupling through 2016.
- Power costs and demand: Management expected 2013 retail deliveries to be comparable to weather-adjusted 2012 levels. It estimated full-year net variable power costs above baseline but within the adjustment mechanism’s deadband, with no customer collection or refund then expected. This could change as the year develops.
- Capital program and financing: Major planned projects include Port Westward Unit 2 ($300 million; expected in service in 2015), Carty ($450 million; expected in 2016), and Tucannon River wind farm ($500 million; expected in the first half of 2015). PGE planned 2013 funding through operating cash flow, debt, and equity. The filing gives both an expectation of $175–$225 million in additional aggregate equity and debt issuances by year-end and a broader 2013 aggregate issuance estimate of $450–$500 million; the scope of these figures should be checked against the full filing.
- Project and outage items: PGE suspended permitting and development of Cascade Crossing after revising its transmission plans with BPA and charged $52 million to expense. It sought regulatory deferral, but recovery was uncertain. After quarter-end, Colstrip Unit 4 suffered damage with estimated repair cost of $30–$40 million and at least six months to repair; Boardman returned to service July 31 after an outage with about $10 million in repair costs. PGE estimated $10–$12 million of replacement-power costs. Insurance claims were possible, subject to deductibles.
- Contingencies: Trojan-related proceedings could result in losses beyond amounts previously recorded; PGE could not estimate a range. Other uncertain matters include Pacific Northwest power-market refund proceedings, Portland Harbor and Downtown Reach environmental investigations, and Clean Air Act litigation concerning Colstrip. The filing also describes a potential Oregon tax impact of up to $7 million if a tax-court ruling is upheld. Separately, a post-quarter July 2013 settlement of a spent-nuclear-fuel case was expected to provide PGE about $44 million, with proceeds benefiting customers.
- Market and liquidity risk: A downgrade below investment grade could trigger additional collateral requests. PGE estimated potential collateral needs of about $81 million after a single-agency downgrade or $229 million after a dual-agency downgrade as of June 30. Principal risks also include commodity prices, weather and generation availability, regulatory outcomes, capital-market access, construction costs, environmental requirements, and legal proceedings.
Most important facts for investors to verify
- Whether the OPUC approved the proposed 2014 rate-case increase, cost of capital, and decoupling extension.
- Whether Cascade Crossing costs become recoverable from customers and whether BPA transmission-capacity discussions produce a definitive agreement.
- Actual repair costs, insurance recoveries, and replacement-power costs from the post-quarter Boardman and Colstrip outages.
- Progress, spending, and financing needs for PW2, Carty, and Tucannon River, including reconciliation of the filing’s two 2013 issuance estimates.
- Developments in Trojan, environmental, Colstrip, and tax contingencies, and the timing and customer disposition of the spent-fuel settlement proceeds.
- Whether operating cash flow, liquidity, and credit ratings remain sufficient through the planned construction cycle and any collateral calls.