Portland General Electric Company — Q2 2020 Form 10-Q
Business and period: PGE is a regulated, vertically integrated electric utility serving approximately 901,000 customers in Oregon. This unaudited report covers the three and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods unless noted. Interim results are seasonal and are not necessarily indicative of full-year results.
Financial performance and position
| Metric ($ millions, except per-share data) | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenues | 469 | 460 | 1,042 | 1,033 |
| Gross margin (non-GAAP) | 360 | 355 | 780 | 749 |
| Income from operations | 71 | 57 | 204 | 168 |
| Net income | 39 | 25 | 120 | 98 |
| Diluted EPS | $0.43 | $0.28 | $1.34 | $1.09 |
| Net interest expense | 34 | 31 | 67 | 63 |
- Revenue and earnings: Q2 revenue rose 2% and six-month revenue rose 1%. Six-month operating income increased 21% and net income increased 22%. Lower variable power costs and operating and maintenance expenses supported results; higher system loads, lower retail deliveries, increased bad-debt expense, and higher depreciation and interest were offsets.
- Cash flow: For the first six months, operating cash flow was $356 million versus $314 million; capital expenditures were $370 million versus $271 million. Financing provided $287 million, compared with $151 million used in the prior-year period. Cash increased to $303 million from $30 million at year-end 2019.
- Balance sheet and liquidity: At June 30, total assets were $8.805 billion and total liabilities were $6.159 billion. Short-term debt was $150 million; long-term debt was $2.816 billion, net of unamortized debt expense. Cash plus available revolving and letter-of-credit capacity totaled $977 million. PGE reported a 45.6% common-equity ratio and a 54.4% debt-to-total-capital ratio under its credit agreement; the covenant limit is 65%.
- Margins and costs: Six-month gross margin increased 4% to $780 million. Purchased power and fuel expense fell 8% to $262 million, reflecting lower average variable power costs, partly offset by greater system load. The filing presents gross margin as a non-GAAP measure; it does not provide a comparable operating-margin percentage.
Material changes and operating trends
- COVID-19 shifted demand between customer classes. Q2 retail deliveries decreased 3%: residential deliveries rose 9%, commercial fell 16%, and industrial rose 3%. For the first half, retail deliveries fell 2% overall, with commercial deliveries down 8% and industrial deliveries up 8%.
- Management attributed earnings improvement principally to lower variable power costs, higher average retail prices, increased wholesale revenue, and lower plant maintenance expense. Wholesale revenue increased 69% in Q2 and 40% for the first half, driven mainly by greater sales volumes.
- At June 30, derivative liabilities from price-risk management activities totaled $185 million versus $131 million at December 31, 2019. These positions manage commodity and foreign-exchange exposure; regulatory accounting defers certain gains and losses.
- Capital spending accelerated: first-half capital expenditures were $370 million, including work on the Wheatridge renewable facility and Integrated Operations Center.
Outlook, management commentary, and risks
- Management maintained a long-term objective of average diluted-EPS growth of 4%–6%. It projected 2020 weather-adjusted retail deliveries to remain flat versus 2019, while noting that customer-class mix changes may affect revenue.
- Management projected 2020 bad-debt expense of $15 million, up from its original $6 million forecast, amid late payments and customer protections including suspended disconnections and late fees. PGE filed for OPUC deferral of certain pandemic-related costs and lost revenue; recovery remains subject to regulatory determination and review.
- For 2020, PGE estimated operating cash generation of $550 million–$600 million, depreciation and amortization of $410 million–$430 million, and capital expenditures of $740 million excluding AFDC. It expected to fund requirements through operating cash, debt issuance of up to $410 million, and commercial paper as needed.
- PGE said it believed it had sufficient liquidity for anticipated 2020 operating and capital needs, while warning that market disruption could increase its cost of capital. Its $150 million 364-day term loan matures April 8, 2021; the company also issued $200 million of 3.15% first-mortgage bonds due 2030.
- Major projects and resource plans include Wheatridge wind, solar, and battery development; the Integrated Operations Center, estimated at $200 million excluding AFDC and targeted for service in Q4 2021; and plans to cease coal-fired operations at Boardman by the end of 2020. The Wheatridge wind portion was expected to enter service by December 2020.
- Contingencies: PGE considers a Portland Harbor cleanup contribution probable, but cannot reasonably estimate its share; the EPA’s sitewide remedy estimate was $1.7 billion. Customer recovery may be available through the PHERA mechanism, subject to prudency and earnings tests. The Oregon City of Portland audit asserted approximately $7 million of franchise taxes, interest, and penalties; PGE recorded no liability and disputes the preliminary finding. The Oregon Supreme Court denied review of the Trojan investment-recovery class-action dismissal in July 2020. The Deschutes River Alliance case remained on appeal, with outcome and potential loss undetermined.
- Principal risks include pandemic-related demand weakness, customer nonpayment, supply-chain or workforce disruption, regulatory and environmental outcomes, commodity-price and collateral exposure, capital-market access and borrowing costs, generation reliability, weather and natural disasters, and cybersecurity. Management said it had not experienced significant supply-chain or workforce availability issues to date.
Important facts for investors to verify
- Whether COVID-19-driven commercial demand weakness and projected $15 million bad-debt expense affect full-year earnings, cash collection, or customer-class revenue mix.
- Actual 2020 capital spending, operating cash flow, financing needs, and refinancing of the $150 million term loan due in April 2021.
- Regulatory outcomes on COVID-19 cost deferrals, Wheatridge cost recovery, decoupling collections, and the 2020 power-cost adjustment mechanism.
- Developments in Portland Harbor allocation and cleanup estimates, including the extent and timing of any recoverable PGE costs.
- Execution, cost, and schedule of Wheatridge and the Integrated Operations Center, and progress toward coal-retirement and emissions objectives.