Portland General Electric Company (NYSE: POR) — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; filed February 15, 2018. This is an annual report, not a standalone Q4 filing. PGE is a regulated, vertically integrated electric utility serving approximately 875,000 retail customers in Oregon.
Financial performance and position
| Metric | FY 2017 | FY 2016 | Change / context |
|---|---|---|---|
| Revenue, net | $2.009 billion | $1.923 billion | Up 4.5% |
| Gross margin (non-GAAP) | $1.417 billion; 70% of revenue | $1.306 billion; 68% | Up $111 million |
| Income from operations | $376 million | $333 million | Up 13% |
| Net income | $187 million | $193 million | Down 3% |
| Diluted EPS | $2.10 | $2.16 | Down 3% |
| Operating cash flow | $597 million | $553 million | Capital expenditures were $514 million; operating cash flow exceeded capex by $83 million |
| Long-term debt, net | $2.426 billion | $2.350 billion | No long-term debt maturity due in 2018 |
- Net income fell despite higher revenue and operating income, principally reflecting higher operating costs and income tax expense. The 2017 tax expense included a $17 million charge from deferred-tax remeasurement under the Tax Cuts and Jobs Act (TCJA).
- At year-end, cash was $39 million, current assets were $526 million and current liabilities were $432 million. PGE had an undrawn $500 million revolving credit facility and $67 million of letters of credit outstanding under separate facilities.
- Common equity ratio was 49.4%; debt to total capitalization under the credit agreement was 51.8%, below its 65% covenant limit. PGE paid $118 million in dividends during 2017 and declared $1.34 per share for the year.
- Retail deliveries rose 3.9%, largely because 2017 was colder in the first quarter and warmer over the summer than 2016. On a weather-adjusted basis, retail deliveries declined 0.6%.
Material changes versus 2016
- Revenue increased $86 million. Retail revenue rose $77 million, primarily from higher weather-driven deliveries and customer growth; lower power-cost recovery in prices partly offset the increase.
- Purchased power and fuel expense decreased $25 million as average variable power cost fell to $26.80/MWh from $28.50/MWh. Lower wind output partly offset savings from lower purchased-power and natural-gas costs.
- Generation, transmission and distribution expense increased $23 million; depreciation and amortization increased $24 million; administrative and other expense increased $17 million; and interest expense increased $8 million.
- Operating cash flow increased $44 million. Capital expenditures declined to $514 million from $584 million, largely because the Carty plant entered service in 2016.
Outlook, management commentary and notable matters
- 2018 funding and investment: PGE forecast capital expenditures of approximately $551 million and operating cash flow of $575 million to $625 million. It expected to fund investment with operating cash flow, debt issuance of up to $100 million and commercial paper as needed.
- Rates: 2018 customer prices took effect January 1 and include an OPUC-authorized $16 million annual revenue increase, approximately 1%. In February 2018, PGE filed a 2019 rate case requesting an approximately 4.8% increase, or $86 million in annual revenue requirement, after adjusting for tax reform. The request remained subject to regulatory review.
- Tax reform: The TCJA remeasurement reduced net deferred tax liabilities by $340 million. PGE recorded $357 million as a regulatory liability expected to be returned to customers over time and recognized a $17 million charge to earnings. The company also sought OPUC approval to defer and refund 2018 net tax benefits; treatment was not yet settled.
- Resource plans: The OPUC acknowledged a 561 MW capacity need for 2021, including 240 MW dispatchable. PGE arranged 200 MW of annual capacity beginning in 2021 and 100 MW of seasonal capacity for 2019–2024. It planned a 100 MWa renewable procurement and proposed 39 MW of energy storage costing an estimated $50 million to $100 million.
- Generation transition: Boardman is scheduled to stop burning coal at the end of 2020. Oregon law generally bars recovery of coal-generation costs and benefits in retail rates after 2030, with an exception for PGE’s Colstrip output through 2035. The law also raises future renewable portfolio requirements.
- Carty: Final construction cost was $637 million, above the $514 million amount authorized for recovery in rates. Incremental depreciation, interest and legal expenses were $14 million in 2017. PGE pursued claims against the contractor and sureties; regulatory recovery and litigation outcomes were uncertain. No loss for potential disallowance had been recorded.
- Portland Harbor: PGE is among more than 100 potentially responsible parties at the Superfund site. The EPA’s selected remedy had an estimated total cost of $1.7 billion and discounted present value of $1.1 billion; PGE could not reasonably estimate its share. PGE stated that a portion of costs was probable and sought insurance and regulatory recovery; the OPUC had approved a recovery mechanism subject to review.
- Other risks: Key exposures include regulatory cost-recovery decisions, power and fuel price volatility, weather, plant outages and variable hydro/wind output, environmental rules, capital-market access, cyber threats, and pending legal proceedings. The 2017 PCAM result was within its deadband, so no customer collection was recorded despite actual net variable power costs being $15 million above baseline.
- The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Progress and final OPUC decisions on the 2019 rate case, the requested tax-benefit deferral, and recovery of Carty-related costs.
- Developments in Carty litigation and the Portland Harbor allocation, potential liability, insurance recovery and customer-cost recovery.
- Whether projected 2018 operating cash flow and capital spending are achieved, and whether planned financing affects leverage, liquidity or dividends.
- Execution and cost of capacity, renewable and energy-storage procurements, including replacement of Boardman output and compliance with rising renewable requirements.
- Effects of future tax guidance and customer refunds, and the impact of weather, wind and hydro conditions, and fuel or wholesale-power prices on earnings and cash flow.