Business context and reporting period
Portland General Electric Company (PGE) filed this unaudited Form 10-Q for the three months ended March 31, 2014. PGE is a vertically integrated electric utility serving Oregon; it reported as one operating segment and served 838,283 retail customers at quarter-end. Results are seasonal and interim performance may not indicate full-year results.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 or comparison |
|---|---|---|
| Revenue | $493 million | $473 million; up 4% |
| Gross margin | $309 million; 63% of revenue | $281 million; 59% of revenue |
| Operating income | $98 million | $87 million |
| Net income attributable to PGE | $58 million | $49 million; up 18% |
| Diluted EPS | $0.73 | $0.65 |
| Operating cash flow | $158 million | $165 million |
| Capital expenditures | $185 million | $108 million |
| Cash and cash equivalents | $64 million at March 31 | $107 million at December 31, 2013 |
| Long-term debt | $1.916 billion, including $70 million current | $1.916 billion at December 31, 2013 |
Revenue growth primarily reflected the January 2014 customer-price increase authorized in PGE’s 2014 general rate case. Lower power and fuel expense also supported results, while depreciation and amortization rose $13 million to $75 million. The filing attributes higher depreciation to capital additions and timing of regulatory deferrals and amortization. Interest expense was $25 million, unchanged year over year.
Cash used in investing activities was $179 million, compared with $107 million in Q1 2013, largely reflecting construction spending. Financing activities used $22 million, primarily for dividends. The declared quarterly dividend was $0.275 per share, versus $0.270 a year earlier.
At March 31, PGE had $685 million of available capacity under revolving credit facilities, no revolving-credit borrowings or commercial paper outstanding, and $15 million of available capacity under separate letter-of-credit facilities. Its covenant debt ratio was 50.8%, below the 65% limit; common equity was 49.2% of capitalization.
Material changes versus the prior comparable period
- Retail revenue rose with higher authorized prices, partly offset by lower delivered volumes. Retail energy deliveries declined 1.7%; residential deliveries fell 2.5%, with commercial and industrial deliveries also lower.
- Purchased power and fuel expense fell $8 million to $184 million, reflecting lower system load and average variable power cost. Colstrip Unit 4’s January outage added approximately $2 million of replacement-power cost.
- Operating income increased $11 million. The filing also identifies a $7 million year-over-year increase in the allowance for funds used during construction, associated with higher construction work in progress.
- Cash from operations decreased $7 million, while capital expenditures increased $77 million. Cash declined by $43 million during the quarter.
Outlook, management commentary and key risks
- Capital program: PGE estimated approximately $1.01 billion of 2014 capital expenditures, including three generation projects. PW2 (220 MW; estimated cost $300 million) was expected online in Q1 2015; Tucannon River wind farm (267 MW; $500 million) was expected online between December 2014 and March 31, 2015; and Carty (440 MW; $450 million) was expected online in 2016. Project estimates exclude allowance for funds used during construction.
- Funding outlook: Management estimated 2014 cash provided by operations of $540 million to $560 million and expected to fund capital needs with operating cash and debt financing. PGE anticipated approximately $305 million of long-term bank loans and $280 million of First Mortgage Bonds in 2014, subject to regulatory approval. No 2014 settlement of the remaining equity forward sale agreement was expected; physical settlement was anticipated by June 11, 2015.
- Rates and regulation: The 2014 general rate case authorized a $61 million annual revenue increase, approximately 4%, effective January 1, 2014. PGE’s pending 2015 rate-case request sought an $81 million net annual increase, approximately 4.6%; the OPUC order was expected by mid-December 2014. These requests were not approved outcomes.
- Power-cost mechanism: Q1 2014 net variable power costs were approximately $3 million below baseline. Based on forecasts, PGE expected no 2014 customer collection or refund under the mechanism.
- Contingencies: Trojan-related regulatory and class-action proceedings remained pending; plaintiffs sought $260 million plus interest, and management said potential additional loss was reasonably possible but not estimable. Other matters included possible Pacific Northwest energy-refund claims, Portland Harbor cleanup exposure that could not be estimated, Colstrip environmental litigation, and an Oregon tax dispute that could increase tax liability by as much as $7 million if the challenged ruling is upheld. PGE had recorded a $3 million reserve and matching regulatory asset for the Downtown Reach remediation estimate.
- Market and operating risks: Commodity-price and foreign-exchange exposures are managed with derivatives, with certain effects deferred through regulatory accounting. A downgrade below investment grade could trigger additional collateral requests; estimated additional collateral was approximately $66 million after a single-agency downgrade or $167 million after a dual-agency downgrade as of March 31. The filing also cites regulatory, weather, generation availability, fuel and power prices, capital-market access, environmental requirements, project execution, cybersecurity, and other risks.
Most important facts for investors to verify
- Progress and final costs, schedules, and regulatory recovery for PW2, Tucannon River, and Carty, given the substantial 2014 construction program.
- Outcome of the pending 2015 rate case and whether requested customer-price increases and project cost recovery are approved.
- Cash-flow generation, debt issuance, liquidity, and any change to the expected $540 million–$560 million 2014 operating-cash-flow range.
- Developments in Trojan, Pacific Northwest refund, Portland Harbor, Colstrip, and Oregon tax proceedings, including whether losses become estimable or require accruals.
- Customer demand, wholesale power and fuel costs, generation availability, and collateral requirements under stressed market or credit conditions.