Business context and reporting period
Portland General Electric Company (PGE) filed this audited Form 10-K for the fiscal year ended December 31, 2016. PGE is a vertically integrated, cost-based regulated electric utility serving approximately 863,000 retail customers in Oregon; the filing reports one business segment. The filing also provides unaudited fourth-quarter results.
Financial and operating highlights
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $1.923 billion | $1.898 billion |
| Gross margin | $1.306 billion; 68% of revenue | $1.237 billion; 65% |
| Income from operations | $333 million | $309 million |
| Net income attributable to PGE | $193 million | $172 million |
| Diluted earnings per share | $2.16 | $2.04 |
| Cash from operating activities | $553 million | $520 million |
| Capital expenditures | $584 million | $598 million |
| Long-term debt, net of debt expense | $2.350 billion | $2.193 billion |
| Common equity ratio | 49.4% | 50.7% |
Revenue rose 1.3% and attributable net income increased about 12%. Lower net variable power costs—supported by better regional hydro conditions, improved wind generation and more wholesale sales—were key earnings contributors. Purchased power and fuel expense fell $44 million to $617 million. Retail electricity deliveries declined 2.1%, including an 8.4% drop in industrial deliveries, partly reflecting a large paper customer that ceased operations in late 2015. Customer growth and authorized rate changes partly offset lower deliveries.
Cash from operations was $553 million; investing activities used $585 million and financing activities provided $34 million. Year-end cash was $6 million. Current assets were $463 million against current liabilities of $577 million. PGE had $500 million available under its revolving credit facility, with no year-end borrowings or commercial paper outstanding. It had $56 million of letters of credit outstanding under separate facilities. Total assets were $7.527 billion.
Fourth-quarter 2016 revenue was $524 million, operating income $106 million, net income $61 million, and diluted EPS $0.68, compared with $499 million, $84 million, $51 million, and $0.57, respectively, in fourth-quarter 2015.
Material changes versus the prior comparable period
- Net income attributable to PGE rose from $172 million to $193 million; diluted EPS rose from $2.04 to $2.16.
- Company-owned generation supplied about 70% of retail load in 2016, versus 65% in 2015. Carty, a new 434 MW natural-gas plant, entered service in July 2016.
- Retail deliveries fell despite customer growth: residential deliveries rose 0.3%, commercial fell 0.7%, and industrial fell 8.4%.
- Long-term debt increased by $157 million, and the common equity ratio declined 1.3 percentage points. The $150 million of unsecured term loans outstanding at year-end mature in 2017.
- Capital expenditures were below 2015 as Carty entered service; 2015 included substantial construction spending on other generation projects.
Outlook, management commentary, risks and unusual items
- Near-term funding: PGE estimated 2017 capital expenditures of approximately $610 million, including about $6 million of Carty completion costs, and $150 million of debt maturities. It expected 2017 operating cash flow of $450–$500 million and planned approximately $450 million of debt issuance. These are forecasts, not results.
- Rates and demand: PGE planned to file a 2018 general rate case by the end of February 2017, with new prices expected in January 2018. Management expected 2017 retail deliveries to be nearly comparable to or slightly below 2016 weather-adjusted levels. The 2017 power-cost tariff was approved with a forecast $56 million reduction in annual revenue requirement versus 2016 levels.
- Resource transition: Oregon legislation requires higher renewable portfolio targets—27% by 2025, rising to 50% by 2040—and accelerates recovery of PGE’s Colstrip investment by 2030. Boardman is scheduled to stop coal-fired operations by the end of 2020. PGE’s 2016 resource plan identified approximately 175 MWa of renewable resources and up to 850 MW of capacity needs; the plan was awaiting regulatory acknowledgment. PGE targeted entry into the western Energy Imbalance Market in fall 2017.
- Carty cost and litigation: PGE estimated Carty’s total cost at approximately $640 million, above the $514 million capital cost then authorized for recovery in customer prices. PGE was seeking recovery of incremental costs and pursuing claims against its former contractor and sureties, including a claim exceeding $200 million against the contractor and a $145.6 million performance bond. Recovery, including regulatory recovery, was uncertain; PGE had not recorded a loss for potential cost disallowance.
- Portland Harbor: The EPA’s January 2017 cleanup decision estimated a $1.05 billion discounted present value for the total site remedy. PGE was one of more than 100 potentially responsible parties and stated that it could not reasonably estimate its share. PGE considered some contribution probable; the amount could be material. A proposed customer cost-recovery mechanism was subject to an OPUC decision expected in 2017.
- Other risks: Results are exposed to regulatory decisions and cost-recovery limits; power and fuel price volatility; weather, hydro and wind conditions; plant outages; financing and collateral needs; environmental and wildlife requirements; storms and cyber risks; and pension funding. A downgrade below investment grade could trigger additional collateral requests. The Clean Power Plan was stayed pending legal challenges.
- Other notable disclosures: PGE recorded a $3 million estimated 2016 decoupling collection, subject to OPUC review. The OPUC extended decoupling through 2019. The 2016 PCAM calculation resulted in no estimated refund or collection. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether PGE recovers Carty costs above the $514 million amount approved in rates, and the outcome and collectability of contractor and surety claims.
- PGE’s eventual allocated liability for Portland Harbor cleanup and natural resource damages, and whether regulators approve the proposed recovery mechanism.
- Execution of the 2017 capital and financing plan, including repayment of the $150 million term loans and planned debt issuance.
- OPUC decisions on the 2018 rate case, decoupling, and power-cost recovery, including confirmation of the 2016 decoupling estimate.
- Resource procurement and cost implications of Oregon’s renewable mandates, Boardman’s 2020 retirement, Colstrip’s accelerated depreciation, and planned capacity additions.