Portland General Electric Company — Q1 2015 Form 10-Q
Business and period. PGE is a vertically integrated electric utility serving Oregon. This unaudited report covers the three months ended March 31, 2015, compared with Q1 2014. Results are seasonal and should not be viewed as necessarily indicative of full-year performance.
Financial performance and position
- Revenue: $473 million, down 4% from $493 million. Retail revenue fell $22 million; wholesale revenue rose $2 million.
- Margins and earnings: Gross margin increased to $312 million (66% of revenue) from $309 million (63%). Operating income declined to $85 million from $98 million; operating margin was 18% versus 20%. Net income was $50 million versus $58 million. Diluted EPS fell to $0.62 from $0.73.
- Cash flow: Operating cash flow was $134 million, down from $158 million. Investing used $167 million, including $178 million of capital expenditures; financing used $67 million. Cash declined $100 million during the quarter to $27 million.
- Debt and liquidity: Long-term debt, including current maturities, was $2.456 billion, compared with $2.501 billion at year-end. Cash and current assets were $27 million and $584 million, respectively; current liabilities were $809 million. The $500 million revolving facility had $454 million available, with no borrowings or commercial paper outstanding. Debt-to-total-capital was 55.9%, below the 65% credit-facility limit; credit ratings remained investment grade.
- Equity and dividends: Common equity was $1.939 billion, and the common equity ratio was 44.1%. The declared quarterly dividend was $0.28 per share, versus $0.275 in Q1 2014.
Material changes and drivers
- Retail energy deliveries declined 3.5%; residential deliveries fell 11.2%, partly offset by 9.3% growth in industrial deliveries. Oregon recorded its warmest January–March period, with heating degree days 22% below Q1 2014 and 21% below average.
- Purchased power and fuel expense fell $23 million (13%), mainly because average variable power cost per MWh declined 11% to $30.59. Greater use of lower-cost purchased power, higher hydro generation, and increased wind output contributed. PGE-generated resources supplied 41% of retail load, versus 59% a year earlier.
- Operating expenses outside purchased power and fuel rose $16 million, including higher generation, IT, and administrative costs. Interest expense increased $5 million to $30 million, primarily due to a higher average debt balance.
- Price-risk-management derivative liabilities increased to $283 million from $228 million; the filing says applicable gains and losses are generally deferred through regulatory accounting until settlement. Q1 operating cash flow was also lower year over year.
Outlook, risks, and unusual items
- Investment and funding: 2015 capital expenditures are estimated at $609 million, including $172 million for the Carty gas plant. Carty is budgeted at $450 million excluding AFDC, with $341 million including AFDC in construction work-in-progress at quarter-end; service is expected in Q2 2016. Management expects 2015 operating cash flow of $420–$460 million and plans approximately $400 million of debt issuance and $270 million from physical settlement of the equity forward sale agreement (EFSA).
- Rates: The 2015 rate order authorized a $15 million annual revenue increase, approximately 1%, effective January 1. PGE’s pending 2016 rate-case request seeks a $66 million annual increase, approximately 3.7%; an OPUC decision was expected by mid-December 2015. The request is not an approved outcome.
- Power-cost outlook: Management estimated 2015 net variable power costs below baseline but within the PCAM deadband; no customer collection or refund was expected. Hydro runoff forecasts for April–September 2015 were below normal at reported locations, and wind output was below planned levels in Q1.
- Financing and collateral: PGE expected to physically settle the EFSA by June 11, 2015, issuing shares for approximately $272 million, and anticipated reducing debt afterward. A downgrade below investment grade could trigger additional collateral demands; estimated potential collateral was approximately $111 million for a single-agency downgrade and $231 million for a dual-agency downgrade as of March 31.
- Contingencies: Trojan-related customer class actions seek $260 million plus interest; management considers a loss reasonably possible but says it cannot estimate a range. Portland Harbor cleanup exposure is also reasonably possible but not estimable. The Colstrip Clean Air Act case had trial scheduled for November 2015; potential loss could not be determined. For the Downtown Reach, PGE recorded a $3 million reserve and matching regulatory asset. A state tax ruling eliminated potential tax liability associated with the prior Oregon Tax Court decision.
- Regulatory and environmental uncertainty: The EPA’s coal-combustion-residuals rule may require changes at Colstrip, with the impact not yet clear. The proposed Clean Power Plan and other environmental requirements could affect operations and costs. PGE stated it would seek customer recovery for certain incremental costs, but recovery is not assured.
- Other: PGE reduced revolving credit capacity from $700 million to $500 million, stating the lower amount was sufficient for liquidity needs. No material changes to reported risk factors or market risks were identified.
Important facts for investors to verify
- Whether the EFSA was physically settled as expected, and the resulting share dilution, cash proceeds, and debt reduction.
- Progress, final cost, and schedule for Carty, along with the OPUC decision on the 2016 rate case.
- Actual 2015 operating cash flow, capital spending, debt issuance, and liquidity as the year progresses.
- Effects of weather, hydro and wind conditions, wholesale power prices, and PCAM outcomes on earnings and customer prices.
- Developments and potential financial exposure in the Trojan, Portland Harbor, and Colstrip proceedings, including any additional collateral requirements.