PORTLAND GENERAL ELECTRIC CO quarterly report, Q1 FY2016

Portland General Electric Company — Q1 2016 Form 10-Q

Business context and reporting period. PGE is a vertically integrated electric utility serving Oregon. This unaudited report covers the three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. PGE served approximately 855,600 retail customers at quarter-end. Management cautions that seasonal utility results are not necessarily indicative of full-year performance.

Financial performance and position

Metric	Q1 2016	Q1 2015 / comparison
Revenue	$487 million	$473 million; up 3%
Operating income	$99 million	$85 million; operating margin 20% vs. 18%
Net income	$61 million	$50 million; net margin 13% vs. 11%
Diluted EPS	$0.68	$0.62
Operating cash flow	$161 million	$134 million
Capital expenditures, cash-flow basis	$131 million	$178 million
Dividends declared per share	$0.30	$0.28

Purchased power and fuel expense fell 7% to $149 million, while total operating expenses were flat at $388 million. Income tax expense rose to $17 million from $10 million; the effective tax rate was 21.8%, compared with 16.7%.

At March 31, 2016, total assets were $7.344 billion, cash was $4 million, current assets were $537 million and current liabilities were $508 million. Long-term debt was $2.199 billion, net of debt issuance costs, with no current portion reported. The company had $500 million of unused capacity under its revolving credit facility, plus $111 million of letters of credit outstanding under separate facilities. Its credit-agreement debt-to-total-capital ratio was 49.9%, below the 65% covenant limit; common equity was 50.4% of capitalization.

Operating cash flow less reported capital expenditures was approximately $30 million. Financing activities used $28 million, including $133 million of long-term debt repayments and $27 million of dividends, partly offset by $140 million of bond issuance. Cash remained $4 million. The $54 million Carty pipeline-capacity capital lease asset was a noncash investing and financing item in the quarter.

Material changes and operating drivers

Revenue increased $14 million: retail revenue rose $19 million, partly offset by a $7 million decline in wholesale revenue. Retail deliveries increased 2.7%, reflecting colder weather than the unusually warm prior-year quarter, customer growth and leap year; weather-adjusted retail deliveries rose 0.6%.
Residential deliveries increased 8.9% and commercial deliveries 4.0%; industrial deliveries fell 10.4%, primarily following the closure of a large paper customer. Management said the 2016 rate case incorporated that customer loss and expected minimal earnings impact.
Average variable power cost declined to $28.13/MWh from $30.59/MWh, supported by greater company generation and lower natural-gas costs. Company generation supplied 56% of retail load versus 41% a year earlier. Higher depreciation, generation-related costs and income taxes partly offset the benefit.
Weighted-average shares increased substantially after 10.4 million shares were issued in June 2015 under the equity forward sale agreement; reported EPS comparisons therefore include a larger share base in 2016.
Long-term debt activity included $140 million of 2.51% first mortgage bonds due 2021 and repayment of $133 million of bonds. Cash from operations increased $27 million year over year; investing cash use decreased by $34 million, mainly due to lower capital spending.

Outlook, management commentary and risks

2016 plan: Management estimated operating cash generation of $450–$490 million and capital expenditures of approximately $649 million, including up to $224 million to complete Carty, before any recovery from the contractor or sureties. It expected to fund capital needs with operating cash, debt issuance of up to $500 million (including the $140 million already issued) and commercial paper as needed. These are estimates, not a reported earnings or EPS forecast.
Carty project: PGE had $501 million, including AFDC, in construction work-in-progress at quarter-end and estimated total cost at $635–$670 million. It targeted service in July 2016. The OPUC had authorized recovery of up to $514 million, including AFDC, provided the plant entered service by July 31, 2016. Recovery of costs above the authorized amount, or recovery timing if the deadline were missed, was not assured. No loss had been recorded because management judged disallowance less than probable.
The original Carty contractor was terminated after being declared in default; the contractor entities entered bankruptcy proceedings. The performance-bond sureties denied liability under a $145.6 million bond, and PGE sued them. The contractor’s parent separately alleged wrongful termination. These disputes create uncertainty around project cost, completion, recovery and potential reimbursement.
Rates and regulation: New 2016 GRC prices took effect January 1. The case forecast a net annual revenue-requirement increase of $12 million, with a $44 million annualized decrease already effective and a $57 million annualized increase tied to Carty entering service by July 31. Oregon’s March 2016 Clean Electricity and Coal Transition Plan raised future renewable portfolio requirements, requires full depreciation of PGE’s Colstrip share by 2030, and affects other resource-planning and rate matters. PGE was evaluating the impact in its 2016 IRP, expected to be filed in the second half of 2016.
Power costs: Q1 actual net variable power costs were $1 million above baseline. Based on the company’s forecast, full-year 2016 costs were expected below baseline but within the PCAM deadband; no customer collection or refund was then expected.
Other contingencies: Portland Harbor cleanup and natural-resource damages could be material, but PGE could not estimate its share; it intended to seek regulatory and insurance recovery. A Trojan-investment customer class-action dismissal was appealed in April 2016; management said a loss remained reasonably possible but could not estimate an amount. PGE had settled its direct claims in the Pacific Northwest refund proceeding for an immaterial amount and did not expect material loss absent adverse changes in rulings. Colstrip environmental litigation had preliminary settlement terms, but no final agreement was reported.
Other risks include weather and demand variability, wholesale power and fuel prices, generation availability, collateral needs, regulatory decisions, environmental requirements, capital-market access and timely, on-budget completion of capital projects. A below-investment-grade downgrade could trigger additional collateral demands; estimated additional collateral exposure at March 31 was approximately $99 million for a single-agency downgrade or $179 million for a dual-agency downgrade.

Most important facts for investors to verify

Whether Carty entered service by July 31, 2016, its final cost, and the amount ultimately recoverable from customers, the contractor or sureties.
Developments in the Carty arbitration, bankruptcy and performance-bond litigation, including any settlement or court ruling.
Whether the Portland Harbor remedy and allocation process produces an estimable PGE obligation, and whether regulatory or insurance recovery is available.
Progress and outcome of the Colstrip environmental settlement, and the appeal of the Trojan class-action dismissal.
Actual 2016 operating cash flow and capital spending versus management’s estimates, and the effect of Oregon’s new renewable and coal-transition requirements on future investment and rates.