Portland General Electric Company — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; unaudited. PGE is a regulated, vertically integrated Oregon electric utility serving approximately 883,000 retail customers.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $449 million | $449 million | $942 million | $979 million |
| Gross margin (revenue less purchased power and fuel) | $345 million (77%) | $331 million (74%) | $708 million (75%) | $720 million (74%) |
| Operating income | $80 million | $69 million | $180 million | $193 million |
| Net income | $46 million | $32 million | $110 million | $105 million |
| Diluted EPS | $0.51 | $0.36 | $1.23 | $1.18 |
- Q2 earnings improved on lower variable power costs, favorable customer-price changes, lower storm and maintenance costs, and reduced income taxes; retail deliveries fell 1.4% year over year.
- First-half revenue declined 4%, primarily because mild weather reduced retail deliveries (down 3.9%) and $25 million of expected Tax Cuts and Jobs Act (TCJA) benefits was deferred for customers. Lower power costs and higher wholesale sales partly offset the decline. First-half net income increased modestly despite lower gross margin.
- First-half operating cash flow was $338 million, compared with $333 million. Investing cash outflow was $265 million, including $266 million of capital expenditures; financing cash outflow was $64 million, including $61 million of dividends paid. Cash ended the period at $48 million.
- At June 30, total debt was $2.426 billion, including $300 million classified as current due to an anticipated 2019 repayment. Current assets were $493 million versus current liabilities of $679 million. PGE had $500 million of unused revolving credit capacity. Debt-to-total capitalization under its credit agreement was 51.3%, below the 65% covenant limit; common equity ratio was 49.9%.
Material changes and management commentary
- Q2 purchased power and fuel expense fell $14 million; the average variable power cost declined to $19.93/MWh from $24.02/MWh. For the first half, the average cost fell to $21.51/MWh from $24.65/MWh, aided by lower natural gas costs and increased wind generation.
- First-half retail demand was affected by mild weather: heating degree-days were 22% below the prior year. Management reported weather-adjusted deliveries up 0.5%, with customer growth and high-tech manufacturing demand partly offset by energy efficiency and conservation.
- The 2018 TCJA customer-benefit deferral totaled $25 million through June 30. Lower tax expense largely offsets the related revenue reduction, so management says the deferral has little net-income effect. Customer refunds remain subject to regulatory approval and an earnings test.
- Q2 dividends declared were $0.3625 per share. The company stated it expects regular quarterly dividends, subject to Board discretion.
Outlook, plans and risks
- PGE forecast 2018 capital expenditures of $648 million, excluding allowance for funds used during construction. It expected operating cash flow of $575–$625 million and planned to fund investment with operating cash, Carty settlement proceeds, up to $75 million of debt issuance, and commercial paper as needed.
- On July 16, 2018, after quarter-end, PGE reached a Carty construction settlement under which sureties will pay $130 million and the parties release their claims. Carty cost $640 million versus $514 million authorized in rates. The settlement is expected to be recorded in Q3; PGE anticipated proceeds would offset incremental construction costs and reduce ongoing excess depreciation and interest, but was still assessing the accounting impact.
- The 2019 rate case requested an approximately 4.8% increase, or $86 million in annual revenue requirement, after TCJA effects. New prices were expected January 1, 2019; the request remained under regulatory review and was not assured.
- Resource planning includes a 100 MWa renewable procurement, a proposed 39 MW energy-storage program with revised estimated capital spending of about $45 million, and regional capacity contracts to help replace Boardman generation, scheduled to end coal operations in 2020.
- Material uncertainties include Portland Harbor environmental remediation: PGE expects to share costs but cannot estimate its liability, which could be material. Trojan customer class actions seek $260 million plus interest; management considers a loss reasonably possible but cannot estimate an amount. A Clean Water Act case concerning the Deschutes River also remains unresolved; the company cannot predict its outcome.
- Other stated risks include regulatory and rate decisions, weather and hydrology, generation outages, fuel and wholesale-market prices, capital-market access and credit ratings, environmental requirements, cyber threats, and execution of capital projects. PGE reported investment-grade ratings and no material change to its previously disclosed risk factors.
- Management reported effective disclosure controls at June 30. A new customer information system implemented in May materially changed internal control over financial reporting.
Important facts for investors to verify
- Q3 recognition, final accounting treatment, and cash receipt of the $130 million Carty settlement, including its net effect on earnings and rate recovery.
- OPUC decisions and final customer-price outcomes for the 2019 rate case and the TCJA benefit deferral.
- Updated estimates, allocation process, insurance recovery, and regulatory treatment for Portland Harbor remediation; developments in the Trojan and Deschutes litigation.
- Actual 2018 capital spending, operating cash flow, financing needs, and the 2019 maturity repayment plan.
- How weather, wholesale power prices, hydro and wind output, and power-cost adjustment mechanisms affect second-half results and customer refunds or collections.