Portland General Electric Company — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; unaudited. PGE is a vertically integrated electric utility serving approximately 885,000 retail customers in Oregon.
Financial performance
- Third quarter: Revenue was $525 million, up 2% year over year; net income was $53 million, up 33%, and diluted EPS was $0.59 versus $0.44. Gross margin, a company-defined non-GAAP measure, increased to $339 million from $331 million.
- First nine months: Revenue was $1.467 billion, down 2%; net income was $163 million, up 12%, and diluted EPS was $1.82 versus $1.62. Gross margin was $1.047 billion versus $1.051 billion.
- Operating income was $91 million for Q3 (versus $78 million) and $271 million year to date (unchanged). Net margins were approximately 10.1% and 11.1%, respectively, compared with 7.8% and 9.7% in the prior-year periods.
- Management attributed the earnings improvement mainly to lower natural-gas-related power costs, increased wholesale sales, lower administrative expense following the Carty settlement, and lower income taxes, including increased production tax credits. Year-to-date retail deliveries fell 2.7%, primarily due to milder first-half weather; weather-adjusted deliveries increased 0.3%.
- Cash flow: Nine-month operating cash flow was $536 million, versus $519 million. Investing used $278 million, including $401 million of capital expenditures and $120 million of Carty settlement proceeds shown in investing activities. Operating cash flow less capital expenditures was $135 million, versus $150 million. Financing used $97 million, including $93 million of dividends. Cash ended at $200 million, up from $39 million at year-end 2017.
- Liquidity and debt: Total debt was approximately $2.427 billion, including $300 million classified as current for 2019 maturities. PGE had a $500 million revolving facility fully unused, plus $59 million of letters of credit outstanding under separate facilities. Its debt-to-total-capital ratio under the credit agreement was 51.2%, below the 65% covenant limit; the common equity ratio was 50.1%.
- Dividends declared were $0.3625 per share for Q3, versus $0.3400 a year earlier. Nine-month dividends declared totaled $1.065 per share.
Material changes and unusual items
- Carty settlement: In July, PGE settled construction-related claims for $130 million from the sureties and mutual releases of claims. PGE applied $120 million to reduce utility plant and $10 million to reduce administrative expense. The settlement ended the ongoing excess depreciation and interest burden associated with the excess construction costs. Up to $5 million of subcontractor liens and claims remain disputed.
- Tax reform: The federal corporate tax rate reduction lowered PGE’s reported tax expense. PGE recorded a $36 million year-to-date reduction in revenue for anticipated customer refunds of 2018 tax benefits, excluding interest; the revenue reduction is largely offset by lower tax expense. The proposed customer refund remains subject to OPUC review and an earnings test.
- Year-to-date wholesale revenue rose $40 million, while retail revenue declined $68 million, reflecting lower deliveries, the tax-benefit deferral and decoupling results, partly offset by the expiration of Trojan spent-fuel customer credits and price changes.
Outlook, management commentary and risks
- PGE estimated 2018 capital expenditures of $640 million, excluding allowance for funds used during construction, and operating cash flow of $545–$595 million. Management expected to fund capital needs with operating cash, the Carty settlement proceeds, up to $75 million of debt securities, and commercial paper as needed.
- The pending 2019 general rate case had been revised from an $86 million requested annual revenue-requirement increase to an expected $12 million net increase, with new prices expected January 1, 2019. The proposed terms included a 9.5% return on equity, 7.3% cost of capital and $4.75 billion average rate base. Final power-cost amounts and OPUC approval remained outstanding; a final order was expected in December 2018.
- To replace capacity as Boardman coal operations are scheduled to end in 2020, PGE had secured regional capacity agreements and was evaluating renewable proposals totaling various wind, solar and storage configurations. It sought OPUC acknowledgment of the renewable RFP shortlist by early December 2018. The OPUC had also outlined development of five energy-storage projects; estimated project capital spending was approximately $45 million.
- Portland Harbor cleanup liability is probable, but PGE said it could not reasonably estimate its share; costs could be material. The company intends to pursue insurance and regulatory recovery. A separate Trojan investment class-action appeal remained pending; plaintiffs seek $260 million plus interest, and PGE said the potential loss could not be estimated.
- PGE prevailed in the Deschutes River Alliance Clean Water Act case, but the plaintiff appealed to the Ninth Circuit in October 2018. Other key exposures include weather and demand variability, wholesale power and fuel prices, plant outages, capital-project execution, environmental rules, collateral requirements and access to capital markets.
- Management expected adoption of lease accounting in 2019 to increase recognized right-of-use assets and lease liabilities, but had not quantified the impact. PGE reported effective disclosure controls; implementation of its new customer information system materially changed internal controls over financial reporting.
Investor verification priorities
- Check the final OPUC decision and effective revenue requirement in the 2019 rate case, including power-cost updates and unresolved recovery mechanisms.
- Monitor Portland Harbor remediation estimates, allocation among responsible parties, insurance proceeds and regulatory recovery, as well as the Trojan appeal and remaining Carty claims.
- Verify 2018 capital spending and cash-flow delivery against estimates, and assess funding for the $300 million 2019 debt maturity and planned investment.
- Track the OPUC disposition of the tax-benefit deferral and the resulting customer refunds, and distinguish those revenue reductions from underlying earnings performance.
- Assess customer demand and weather trends, wholesale-market exposure, and collateral needs under any credit-rating or commodity-price stress.