Business context and reporting period
Portland General Electric Company (PGE) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. PGE is a vertically integrated electric utility operating in Oregon, serving 859,497 retail customers at quarter-end.
Financial performance and condition
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $428 million | $450 million | $915 million | $923 million |
| Operating income | $64 million | $72 million | $163 million | $157 million |
| Net income | $37 million | $35 million | $98 million | $85 million |
| Diluted EPS | $0.42 | $0.44 | $1.10 | $1.07 |
| Gross margin | 71% | 67% | 70% | 67% |
| Operating margin | 15% | 16% | 18% | 17% |
For the first half, operating cash flow was $338 million versus $248 million; capital expenditures were $319 million, leaving approximately $19 million of operating cash flow after capital expenditures. Cash ended the period at $93 million, up from $4 million at year-end 2015. PGE reported long-term debt of $2.324 billion, no short-term borrowings, and $500 million of unused revolving credit capacity. Its common equity ratio was 49.2%; its credit-agreement debt-to-total-capital ratio was 51.1%, within the 65% limit. Dividends declared were $0.32 per share in Q2.
Changes versus comparable periods
- Q2 revenue declined $22 million, while net income rose $2 million; diluted EPS fell from $0.44 to $0.42, reflecting in part the 10.4 million shares issued in June 2015.
- Six-month revenue declined $8 million, but net income increased $13 million and diluted EPS rose from $1.07 to $1.10.
- Lower natural-gas and power costs, together with stronger hydro and wind generation, reduced purchased power and fuel expense by $22 million in Q2 and $34 million for the first half. First-half actual net variable power costs were $6 million below baseline.
- Retail energy deliveries decreased 5.2% in Q2 and 1.2% for the first half. Mild Q2 weather and the closure of a large paper customer weighed on deliveries; first-half residential demand benefited from cooler weather than in 2015.
- Depreciation and amortization increased $7 million in Q2 and $14 million in the first half, principally due to capital additions and regulatory amortization timing. First-half interest expense fell $4 million.
Outlook, risks and unusual items
- Carty Generating Station: The 440-MW gas plant entered service July 29, 2016, after the reporting date. Estimated total cost is $640–$660 million, versus up to $514 million authorized for recovery in customer prices. PGE plans to seek recovery of excess costs in a future rate proceeding and requested deferral of the incremental revenue requirement, but recovery is not assured. The performance-bond sureties denied liability; related litigation is ongoing. No loss had been recorded because disallowance was not considered probable.
- 2016 funding outlook: PGE estimates capital expenditures of approximately $646 million and operating cash flow of $480–$520 million for 2016. It expects to fund requirements with operating cash flow and debt issuance, including up to $415 million of debt securities. The company had borrowed $125 million under a $200 million unsecured term-loan agreement, with up to $75 million remaining available to draw by October 31, 2016.
- Rates and resource plans: An updated 2017 power-cost filing forecast a 1.4% decrease in prices for cost-of-service customers, subject to further updates. Carty’s approved rate increase took effect August 1, 2016, alongside customer-credit amortization. PGE suspended its proposed renewable-resource RFP after the OPUC took no action; the timing of a revised process is uncertain. The 2016 integrated resource plan was expected in the second half of 2016.
- Regulatory and environmental exposure: The EPA’s proposed Portland Harbor cleanup plan estimated present-value cost of $746 million, but PGE’s share and natural-resource damages could not be estimated. PGE considers its share potentially material and is seeking regulatory and insurance recovery. Trojan customer class actions were dismissed at trial but are on appeal; potential loss cannot be estimated. PGE said the Pacific Northwest wholesale-refund matter was not expected to cause material loss unless relevant FERC or court decisions change.
- Other developments: Oregon’s OCEP raises future renewable portfolio requirements and requires PGE to fully depreciate its Colstrip interest by 2030, with possible use in Oregon through 2035. A Colstrip-related settlement dropped alleged violations against owners, subject to court approval. The Clean Power Plan was stayed pending legal challenges. Management cited weather, energy and fuel prices, plant performance, capital-market access, regulation, litigation, environmental requirements, and cybersecurity among risks.
Important facts for investors to verify
- Progress and final cost of Carty, the outcome of surety and contractor claims, and OPUC treatment of costs above the $514 million recovery authorization.
- Actual 2016 operating cash flow, capital spending, financing needs, and compliance with debt covenants and credit ratings.
- Final 2017 power-cost rates and the timing and terms of any revised renewable procurement process.
- Potential PGE allocation and recoverability of Portland Harbor cleanup and natural-resource damages.
- Appeal outcomes in the Trojan class actions and developments in other regulatory, environmental, and litigation matters.