Portland General Electric Company — 2018 Form 10-K
Business context and period: Vertically integrated, regulated electric utility serving Oregon; fiscal year ended December 31, 2018. PGE served about 885,000 retail customers. Figures are in U.S. dollars; financial amounts below are in millions unless stated otherwise.
Financial and operating results
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Total revenue | $1,991 | $2,009 | Down 0.9% |
| Gross margin | $1,420 | $1,417 | Essentially flat; reported as 70% of revenue in both years |
| Operating income | $346 | $380 | Down 9% |
| Net income | $212 | $187 | Up 13% |
| Diluted EPS | $2.37 | $2.10 | Up 13% |
| Operating cash flow | $630 | $597 | Up $33 |
| Capital expenditures | $595 | $514 | Up $81 |
| Long-term debt, net | $2,478 | $2,426 | $300 due in 2019 |
| Cash and cash equivalents | $119 | $39 | At year-end |
| Common equity ratio | 49.8% | 49.4% | Near the company’s approximately 50% objective |
Fourth-quarter 2018 revenue was $524, operating income $75, net income $49, and diluted EPS $0.55, compared with $515, $112, $42, and $0.48, respectively, in fourth-quarter 2017.
Retail deliveries fell 2.5% to 19.2 million MWh, mainly reflecting milder winter weather; weather-adjusted retail deliveries increased 0.4%. Average retail customers grew 1.3%. Wholesale revenue rose 51% to $159, while purchased power and fuel expense declined 4% to $571. The resulting $3 increase in gross margin masked lower operating income, as depreciation and amortization rose $37 and administrative and other expense rose $11. Net income benefited substantially from income tax expense falling to $17 from $86, reflecting tax reform and other tax items.
Liquidity included a $500 undrawn revolving credit facility and $119 cash at year-end. Current assets were $643 and current liabilities $791. The credit facility covenant limits debt to total capitalization to 65%; the reported ratio was 51.5%. PGE’s debt ratings remained investment grade, with stable Moody’s and positive S&P outlooks.
Material changes and unusual items
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate from 35% to 21%. The OPUC approved a $45 customer refund for 2017–2018 tax benefits, to be reflected in prices over two years beginning January 2019.
- A $130 Carty construction litigation settlement was received in 2018: $120 reduced the plant’s carrying amount and $10 reduced administrative expense. The settlement resolved the parties’ claims; PGE withdrew its related regulatory deferral request.
- PGE recorded a $12 charge after the OPUC concluded it lacked authority to defer certain capital-investment costs. The charge reserved the customer information system deferral; recovery is uncertain. The $152 customer information system entered service in 2018.
- 2017 included significant storm restoration costs; their decline helped reduce 2018 generation, transmission, and distribution expense. Depreciation increased with capital additions and the new customer information system.
- Boardman is scheduled to stop coal-fired operations at the end of 2020. Colstrip’s adjacent mine operator entered bankruptcy, and rejection of the coal supply contract could constrain supply and increase replacement-power costs.
Outlook, management commentary, and risks
- For 2019, PGE expects retail deliveries to be nearly comparable to, or slightly above, 2018 weather-adjusted levels. Forecast operating cash flow is $550–$600; planned capital expenditures are about $580. PGE expects to issue up to $375 of debt and use commercial paper as needed. A $300 debt maturity is due in 2019.
- The 2019 rate-case order provides an estimated $9 annual revenue increase, or about 0.5% in customer prices, effective January 1, 2019, after customer credits and tax-reform effects. The order sets a 9.50% authorized return on equity and $4.75 billion rate base.
- PGE and NextEra announced the Wheatridge project: 300 MW wind, 50 MW solar, and 30 MW battery storage. PGE plans to own 100 MW of wind for an estimated $160 investment; the project and related agreements remain subject to approvals and prudency review. Wind is expected online by December 2020; solar and storage are planned for 2021.
- Portland Harbor remediation exposure is probable but not reasonably estimable and could be material to financial position. The PHERA mechanism permits recovery subject to prudency reviews and other conditions.
- Other key exposures include regulatory cost-recovery decisions; weather, hydro and wind variability; power and fuel price volatility and collateral calls; environmental and emissions requirements; construction execution; cybersecurity and natural disasters; and litigation. The Deschutes River Alliance’s appeal followed a district-court ruling for PGE. Trojan customer class-action appeals remained pending.
Important facts for investors to verify
- Whether PGE can maintain earnings and cash generation as customer deliveries, weather, wholesale prices, and power costs fluctuate.
- Final regulatory treatment of the $12 customer-information-system deferral charge and the 2019 rate-case assumptions.
- Progress and cost recovery for Wheatridge, energy storage, and other capital investment; compare actual spending with the $580 2019 plan.
- Colstrip coal availability and replacement-power costs, along with Boardman’s planned 2020 retirement and associated resource replacement.
- Portland Harbor liability allocation, insurance proceeds, and OPUC recovery; the filing does not provide a clear estimate of PGE’s potential cleanup liability.
- Refinancing of the $300 2019 maturity, planned debt issuance, liquidity headroom, and any change in credit ratings or collateral requirements.