Portland General Electric Company — Q3 2014 Form 10-Q
Business context and period. PGE is a vertically integrated electric utility serving Oregon. This unaudited report covers the three and nine months ended September 30, 2014, compared with the same 2013 periods. At quarter-end, PGE served 843,110 retail customers.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $484 million | $435 million | $1.400 billion | $1.311 billion |
| Gross margin | $282 million; 58% | $245 million; 56% | $872 million; 62% | $773 million; 59% |
| Operating income | $65 million; 13% | $53 million; 12% | $221 million; 16% | $129 million; 10% |
| Net income attributable to PGE | $39 million | $31 million | $132 million | $58 million |
| Diluted EPS | $0.47 | $0.40 | $1.63 | $0.76 |
| Operating cash flow | Not separately stated for the quarter | $473 million | $459 million |
Revenue rose 11% in Q3 and 7% year to date. Management attributed higher earnings chiefly to the 2014 rate increase, lower net variable power costs, increased customer deliveries and higher allowance for funds used during construction (AFDC). Year-to-date comparison also benefited from 2013 charges: $52 million for the discontinued Cascade Crossing project and a $9 million customer billing refund.
Q3 retail deliveries increased 4.1%; year-to-date retail deliveries rose 0.7%. Q3 results also reflected warmer weather and higher wholesale sales. Year-to-date purchased power and fuel expense decreased $10 million, while operating expenses included higher depreciation, maintenance and incentive compensation.
Financial position, debt and liquidity
- Cash and cash equivalents were $97 million at September 30, 2014, versus $107 million at December 31, 2013.
- Long-term debt was $2.321 billion, including $70 million classified as current, compared with $1.916 billion at year-end 2013. Debt increased principally following $305 million of floating-rate term loans and issuance of $100 million of first mortgage bonds during the nine-month period.
- Operating cash flow was $473 million; investing cash outflow was $821 million, including $824 million of capital expenditures; financing cash inflow was $338 million. Cash declined $10 million during the period.
- PGE reported $691 million of available capacity under revolving credit facilities, with no revolving-credit or commercial-paper borrowings outstanding. Its debt ratio under credit agreements was 55.1%, below the 65% covenant limit. Common equity was 44.9% of capitalization.
- Dividends declared were $0.280 per share in Q3, versus $0.275 a year earlier. Nine-month dividends declared were $0.835 per share.
Material developments, outlook and management commentary
- Generation investment: PGE reported approximately $1 billion of expected 2014 capital expenditures. PW2 (220 MW; estimated cost $300 million) and Tucannon River wind farm (267 MW; estimated cost $500 million) were expected online in late 2014 to early 2015. Carty (440 MW; estimated cost $450 million) was expected online in mid-2016. All were reported on budget; amounts exclude AFDC.
- Funding outlook: Management expected 2014 operating cash flow of $470–$500 million and planned to fund capital needs with operating cash and debt proceeds. The filing does not provide a specific full-year earnings or EPS forecast.
- Rates: The 2014 general rate case increased annual revenues by $61 million, with new prices effective January 1, 2014. A 2015 rate-case stipulation, subject to OPUC approval, estimated a net annual revenue increase of about $17 million, or approximately 1%; new plant-related increases were to take effect as PW2 and Tucannon River entered service, while customer credits and a base-business decrease were also included.
- Power costs: Management estimated 2014 net variable power costs would be below baseline but within the PCAM deadband, and therefore expected no 2014 customer collection or refund under that mechanism. Year-to-date retail energy deliveries were up 0.7%, while wind generation remained below AUT projections.
- Other financing: PGE expected to issue the remaining $180 million of bonds under its purchase agreement after quarter-end: $100 million was issued October 15, 2014, and $80 million was expected in November. The company also anticipated physical settlement of its equity forward sale agreement by June 11, 2015; it could receive $278 million in exchange for 10.4 million shares at quarter-end.
Risks, contingencies and unusual items
- Legal and environmental matters: PGE said losses were reasonably possible in several matters but, except where noted, could not estimate a liability or loss range. Trojan-related customer class actions seek $260 million plus interest; the Oregon Supreme Court affirmed the relevant OPUC order in October 2014, but the class actions remain pending and potential additional loss is not estimable.
- Portland Harbor: PGE is one of more than 100 potentially responsible parties at the Superfund site. Cleanup costs and allocation among parties remain undetermined. Separately, PGE recorded a $3 million reserve and matching regulatory asset for the Downtown Reach remediation, which management considered probable of recovery through rates.
- Colstrip: Clean Air Act litigation and a challenge to the wastewater-facility consent order remained pending. The company said a loss was reasonably possible, but it could not predict the outcome or determine whether the impact would be material. Trial in the Clean Air Act matter was scheduled for August 2015.
- Other legal exposure: Pacific Northwest wholesale-market refund proceedings could lead to future claims, but PGE could not estimate its potential liability. An Oregon tax apportionment appeal could increase future tax liability by as much as $7 million if the adverse ruling is upheld.
- Market and credit risk: Derivative liabilities were $122 million against $6 million of derivative assets. If credit-related contingent features were triggered at quarter-end, PGE estimated a $116 million immediate collateral or settlement requirement. A ratings downgrade below investment grade could also prompt additional collateral requests.
- Regulatory and operating risks: The proposed EPA Clean Power Plan could increase operating costs if adopted. Other disclosed risks include weather, plant outages, fuel and wholesale power prices, capital-project execution, regulatory cost recovery, interest rates and access to capital.
Investor verification priorities
- Confirm OPUC approval and final terms of the 2015 rate-case stipulation, including the timing and customer impact of plant-related rates and credits.
- Track construction completion, final costs and in-service dates for PW2, Tucannon River and Carty, and the associated funding and rate recovery.
- Review subsequent debt issuance, term-loan refinancing needs and settlement of the equity forward sale agreement.
- Monitor the Trojan class actions, Colstrip litigation, Portland Harbor allocation and cleanup decisions, and the Oregon tax appeal for changes in estimable exposure.
- Assess liquidity and collateral sensitivity to commodity-price movements or credit-rating changes, alongside the company’s high planned capital spending.