Portland General Electric Company (PGE) — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Financial statements are unaudited. PGE is a vertically integrated electric utility serving approximately 923,000 retail customers in Oregon.
Financial performance
| Metric | Q3 2022 | Q3 2021 | First 9 months 2022 | First 9 months 2021 |
|---|---|---|---|---|
| Total revenue | $743 million | $642 million | $1,960 million | $1,788 million |
| Operating income | $92 million | $83 million | $310 million | $277 million |
| Net income | $58 million | $50 million | $182 million | $178 million |
| Diluted EPS | $0.65 | $0.56 | $2.04 | $1.98 |
| Operating margin | 12.4% | 12.9% | 15.8% | 15.5% |
| Net margin | 7.8% | 7.8% | 9.3% | 9.9% |
Margins are calculated as operating income or net income divided by total revenue. Revenue rose 16% in Q3 and 10% year to date; net income rose 16% in Q3 but only 2% year to date. Higher customer prices, retail deliveries, and wholesale sales supported revenue. Wholesale revenue increased $48 million in Q3 and $95 million year to date, largely reflecting higher market prices. Purchased power and fuel expense rose 30% in Q3 and 15% year to date, reflecting load growth and power-market costs; year-to-date average variable power cost per MWh was higher even though the reported cost bridge also reflects generation and dispatch changes.
Cash, debt, and liquidity
- Operating cash flow was $574 million for the first nine months, versus $582 million a year earlier. Capital expenditures were $541 million, compared with $486 million.
- Cash and cash equivalents were $18 million at September 30, 2022, down from $52 million at year-end 2021. Net cash used in financing was $80 million, including $117 million of dividends and $18 million of share repurchases.
- Long-term debt was $3.286 billion, net of debt issuance costs; short-term commercial paper outstanding was $40 million. Finance lease obligations totaled $317 million, including current and noncurrent amounts.
- Available liquidity was reported as $797 million: $650 million of unused revolving credit capacity, $129 million of available letter-of-credit capacity, and $18 million cash. PGE reported a 54.8% debt-to-total-capital ratio under its credit agreement, below the 65% covenant limit; its common equity ratio was 45.3%.
- After quarter-end, PGE entered into a $260 million, 366-day term loan on October 21, 2022, bearing interest based on Term SOFR plus stated adjustments and margin, and due October 22, 2023.
Material changes and business developments
- Retail energy deliveries increased 3% year to date, led by 11% growth in industrial deliveries; the industrial increase was attributed primarily to high-tech and digital-services growth. Total retail customer count increased about 1.2% year over year.
- The 2022 Oregon rate case raised the authorized revenue requirement by $74 million and set a 9.5% authorized return on equity and a 50% debt/50% equity capital structure. New prices took effect May 9, 2022. The order also ended the decoupling mechanism, established earnings tests for certain deferrals, and accelerated Colstrip depreciation.
- Cash flow from operations was slightly lower despite higher net income, with changes including wholesale-counterparty margin deposits and the timing of storm-cost deferrals. PGE’s derivative asset positions increased with higher wholesale gas and electricity prices.
- PGE sold an additional 16.66% interest in the Pelton/Round Butte hydro project to the Confederated Tribes of the Warm Springs Reservation effective January 1, 2022, while agreeing to purchase the tribe’s share of project output through 2040.
Outlook, risks, and unusual items
- Management estimated 2022 operating cash generation of $550 million to $600 million and 2022 capital expenditures of $750 million, excluding AFUDC. It expected to fund capital needs with operating cash flow and short- and long-term borrowing; planned 2022 long-term debt issuance was up to $460 million. Estimated 2023 capital expenditures, including $415 million for Clearwater Wind, were $1.15 billion.
- PGE stated its long-term diluted EPS growth guidance was 5%–7% on average. Its 2022 PCAM forecast showed net variable power costs below baseline and within the deadband, with no customer refund expected based on the preliminary regulated-return estimate.
- PGE and NextEra Energy Resources agreed to develop a 311 MW Montana wind facility: PGE expects to own 208 MW for approximately $415 million, excluding AFUDC, and purchase the output associated with the remaining 103 MW under a 30-year power purchase agreement. The project is expected to begin commercial operation by December 31, 2023, subject to approvals and review.
- A third-quarter $11 million retiree medical plan settlement gain increased other income. Year-to-date results also included pre-tax charges of $17 million related to the 2020 earnings test, including $15 million for wildfire deferrals and $2 million for COVID-19 deferrals, as well as a separate $17 million total charge reflected in the cash flow reconciliation reserve adjustments. The filing describes regulatory recovery and earnings-test uncertainty for these balances.
- Regulatory stipulations submitted after quarter-end proposed seven-year recovery of the February 2021 ice-storm deferral and 2020 wildfire deferrals, subject to OPUC approval. A separate PCAM stipulation proposed recovery of the 2021 balance except for $2 million, over two years beginning in 2023. Recovery remains subject to regulatory approval and prudence or earnings tests.
- Material exposures include potential Portland Harbor Superfund remediation liability; PGE said its share cannot currently be reasonably estimated and could be material to financial position. The OPUC’s review of wildfire, storm, COVID-19, and other regulatory deferrals could result in additional disallowances or refunds. PGE also faces ongoing CFTC, SEC, and FERC investigations related to previously announced energy-trading losses, with scope and outcome not predictable.
- Key operating risks include extreme weather and wildfire, wholesale power and fuel price volatility, supply-chain and construction cost increases, plant outages, credit and collateral needs, and regulatory and legal outcomes. PGE reported that disclosure controls were effective and that no material changes to risk factors or internal control over financial reporting were identified.
Important facts for investors to verify
- Whether revenue growth and Q3 earnings gains persist after accounting for higher purchased power costs, wholesale-market volatility, and the one-time $11 million settlement gain.
- OPUC approval and final recovery treatment for wildfire, ice-storm, PCAM, COVID-19, and other regulatory deferrals, including any earnings-test refunds or disallowances.
- The eventual allocation and recoverability of PGE’s Portland Harbor remediation costs, which the company cannot yet estimate.
- Funding, regulatory approval, project costs, and execution timing for Clearwater Wind and PGE’s broader clean-energy capital program.
- Liquidity and collateral sensitivity to market prices or a credit-rating downgrade, as well as refinancing of the $260 million bridge loan by its October 2023 maturity.