Portland General Electric Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. PGE is a vertically integrated electric utility serving approximately 877,000 retail customers in Oregon.
Financial results and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenues | $493 million | $530 million; down 7% |
| Gross margin | $363 million; 74% of revenue | $389 million; 73% |
| Operating income / margin | $100 million / 20% | $124 million / 23% |
| Net income | $64 million | $73 million |
| Diluted EPS | $0.72 | $0.82 |
| Operating cash flow | $194 million | $170 million |
| Capital expenditures | $131 million | $114 million |
| Cash and cash equivalents | $70 million at March 31 | $39 million at December 31, 2017 |
| Long-term debt | $2.426 billion | Unchanged from December 31, 2017 |
Operating cash flow exceeded investing cash outflow of $130 million. The quarterly dividend declared was $0.34 per share, versus $0.32 a year earlier. Total assets were $7.892 billion and total equity was $2.449 billion at quarter-end. PGE’s common-equity ratio was 49.7%; its debt-to-total-capital ratio under its credit agreement was 51.4%, below the 65% covenant limit.
Changes and operating drivers
- Retail energy deliveries fell 6%, primarily because the quarter was warmer: heating degree-days were 19% below Q1 2017 and 3% below the 15-year average. Weather-adjusted deliveries increased 0.5%.
- Retail revenues declined $52 million, partly offset by wholesale revenues rising $15 million, as wholesale sales volume increased. Lower customer demand and lower natural-gas prices supported greater wholesale sales.
- Purchased power and fuel expense fell $11 million (8%); average variable power cost declined 9% to $22.96/MWh. Wind generation increased 59% year over year, while natural-gas generation costs also declined.
- Generation, transmission and distribution expense decreased $12 million, mainly from lower storm-restoration and maintenance costs. Depreciation and amortization increased $8 million, while interest expense rose $1 million.
- The federal tax-rate reduction under the Tax Cuts and Jobs Act lowered income tax expense to $8 million from $23 million; the effective tax rate was 11.1% versus 24.0%. PGE recorded a $15 million year-to-date regulatory liability for expected customer refunds of tax benefits, largely offsetting the revenue reduction’s earnings effect.
Outlook, commentary and key risks
- 2018 plan: PGE expects capital expenditures of $655 million, operating cash flow of $575–$625 million, and debt-securities issuance of up to $150 million. It reported $500 million of unused capacity on its revolving credit facility at March 31.
- Rates: The February 2018 rate-case filing seeks an approximately 4.8% increase in customer prices, or $86 million in annual revenue requirement, based on a 2019 test year. New prices are expected January 1, 2019; the OPUC’s final order was targeted for mid-December 2018.
- Resources and investment: PGE is pursuing a renewable-resource RFP with a 100 MWa procurement target and is working through an energy-storage proposal. The 2016 IRP update forecasts approximately 112 MW of remaining capacity need after executed capacity contracts and other changes. Boardman is scheduled to end coal-fired operations by the end of 2020.
- Carty project: Capitalized construction cost was $637 million versus $514 million authorized in rates. Incremental cost-of-service expense was $3 million in Q1 and is estimated at approximately $14 million for 2018. Recovery is uncertain; related claims against the contractor and sureties remain in litigation, and the contractor seeks $161 million in claims.
- Environmental and other contingencies: PGE expects to share Portland Harbor cleanup costs but cannot reasonably estimate its portion; costs could be material. The Trojan customer class-action appeal and Deschutes River Alliance Clean Water Act litigation remain unresolved. The filing does not quantify a clear potential loss for these matters.
- Other exposures: Commodity-price volatility, weather and generation outages, capital-project execution, regulatory decisions, environmental requirements, and access to capital could affect results. A downgrade below investment grade could trigger additional collateral demands; estimated additional collateral exposure at March 31 was $68 million for a single-agency downgrade and $170 million for a dual-agency downgrade.
- PGE stated that its disclosure controls were effective and that there were no material changes to its previously disclosed risk factors. No specific earnings guidance was provided.
Important facts for investors to verify
- Progress and outcome of the 2019 rate case, including the final approved revenue requirement and effective rates.
- Whether the OPUC approves the proposed customer refund and recovery treatment for TCJA benefits.
- Results and recoverability of Carty claims, any regulatory cost recovery, and potential disallowances.
- Portland Harbor allocation and remediation exposure as sampling and allocation work proceeds.
- Actual 2018 capital spending and operating cash flow against the stated ranges, plus financing needs and collateral exposure.
- Whether weather-normalized demand, power costs, and generation availability support the company’s expected annual performance.