Business context and reporting period
Portland General Electric Company (PGE) is a vertically integrated, regulated electric utility operating in Oregon. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the first quarter of 2018. PGE served approximately 887,000 retail customers.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenues | $573 million | $493 million |
| Gross margin (non-GAAP) | $394 million; 69% of revenue | $363 million; 74% of revenue |
| Operating income | $111 million | $100 million |
| Net income | $73 million | $64 million |
| Diluted EPS | $0.82 | $0.72 |
| Operating cash flow | $156 million | $194 million |
| Capital expenditures | $150 million | $131 million |
Revenue rose 16% year over year, while net income increased 14%. Retail revenue benefited from colder weather, higher deliveries, tariff changes and decoupling-related collections; wholesale and other operating revenues also increased. Retail deliveries grew 4.3%, but weather-adjusted deliveries declined 0.3%. Gross margin as a percentage of revenue fell five percentage points as purchased power and fuel expense increased 38% to $179 million, reflecting higher market prices and weaker hydro and wind output. Operating margin was 19%, versus 20%; net margin was 13% in both periods.
At March 31, cash and cash equivalents were $89 million, down from $119 million at year-end 2018. Current assets were $596 million and current liabilities were $731 million. Long-term debt, net of unamortized debt expense, was $2.478 billion, including $300 million classified as current. The company had $500 million of unused revolving-credit capacity and $83 million of letters of credit outstanding under separate facilities. Debt-to-total capitalization under the credit agreement was 49.3%; the common equity ratio was 50.7%.
Material changes versus the prior period
- Purchased power and fuel costs rose $49 million, with average variable power cost increasing to $31.59/MWh from $22.96/MWh. PGE cited colder weather, regional gas supply constraints, and reduced hydro and wind generation.
- Cash from operations declined $38 million, primarily due to working-capital movements, including higher receivables and unbilled revenue.
- Plant availability improved to 98% from 82%; PGE-owned generation supplied 82% of retail load, versus 70% a year earlier.
- Quarterly dividends declared were $0.3625 per share, compared with $0.3400 in Q1 2018.
Outlook, commentary, risks and unusual items
- Management expected 2019 capital expenditures of $600 million, excluding allowance for funds used during construction, and operating cash flow of $550 million to $600 million. PGE expected to issue up to $450 million of debt securities to help fund requirements.
- The company forecast 2019 net variable power costs below baseline but within the PCAM deadband; it therefore expected no PCAM refund for 2019. It expected hydro output to be 0%–5% below AUT projections and wind output up to 10% below projections for the year.
- On April 12, 2019, after quarter-end, PGE issued $200 million of 4.30% First Mortgage Bonds due 2049; proceeds were used to repay the $300 million debt maturity on April 15.
- Oregon’s clean-energy requirements, the planned cessation of coal-fired operations at Boardman by the end of 2020, and proposed climate legislation may affect resource planning, costs and rates. PGE was preparing a 2019 Integrated Resource Plan for anticipated filing in summer 2019.
- Portland Harbor Superfund costs are probable to be shared by PGE, but the company said it could not reasonably estimate its liability or allocation; the amount could be material to financial position. The company expects to pursue third-party and, if necessary, customer recovery, subject to regulatory review.
- Trojan-related customer class actions remained on appeal; management said a loss was reasonably possible but could not estimate an amount. PGE had prevailed in the Deschutes River Alliance case, which the plaintiff appealed.
- Commodity prices, weather, generation outages and renewable output, fuel availability, regulatory decisions, environmental requirements, capital-market access and collateral demands are among the stated risks. PGE reported investment-grade ratings and no material change to previously disclosed risk factors.
- Adoption of the new lease standard resulted in $44 million of lease right-of-use assets and liabilities, alongside derecognition of certain build-to-suit and lease balances; management reported no material impact on financial position or expected ongoing results.
Important facts for investors to verify
- Whether power and fuel costs, hydro and wind production, and wholesale-market conditions track management’s 2019 expectations.
- Actual 2019 operating cash flow and capital spending versus the stated ranges, and the funding and refinancing of debt maturities.
- Developments in Portland Harbor allocation, recoveries and potential exposure, and the outcomes of the Trojan appeal and other legal matters.
- Regulatory decisions affecting capital-cost recovery, customer rates, the PCAM, clean-energy requirements and proposed Oregon climate legislation.
- Potential liquidity and collateral requirements if market prices move adversely or credit ratings change.