Portland General Electric Company — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. PGE is a vertically integrated electric utility serving approximately 912,000 retail customers in Oregon.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $537 million | $469 million | $1,146 million | $1,042 million |
| Gross margin | $352 million | $360 million | $792 million | $780 million |
| Operating income | $61 million | $71 million | $194 million | $204 million |
| Net income | $32 million | $39 million | $128 million | $120 million |
| Diluted EPS | $0.36 | $0.43 | $1.43 | $1.34 |
| Operating cash flow | Not separately stated for Q2 | $276 million | $356 million |
- Q2 revenue increased 14%, but purchased power and fuel expense rose 70% to $185 million. PGE attributed pressure to higher power costs, including lower regional hydro and wind output and elevated market prices during the late-June heat wave.
- Q2 gross margin fell 2% and net income fell 18% year over year. For the first half, gross margin increased 2% and net income increased 7%, helped in part by higher retail deliveries, excess natural-gas sales, Wheatridge generation, and benefit-trust performance.
- Retail energy deliveries increased 11% in Q2 and 6% for the first half. The service territory experienced record heat; system peak load reached 4,441 MW on June 28.
- Six-month investing cash outflow was $337 million, primarily reflecting $326 million of capital expenditures. Financing cash outflow was $179 million; cash declined from $257 million at year-end 2020 to $17 million at June 30, 2021.
- At June 30, total long-term debt was $2.907 billion, net of unamortized debt expense, and short-term debt was $200 million. The company reported $668 million of total liquidity, including $500 million of unused revolving credit and $17 million of cash. Its debt-to-total-capital ratio under the credit agreement was 55.3%, versus a 65% covenant limit; the common equity ratio was 46.1%.
Material changes and notable items
- Q2 purchased power and fuel costs rose $76 million year over year; average variable power cost per MWh increased to $32.08 from $20.35. Wholesale revenue increased $14 million in Q2, primarily from higher market prices.
- The February 2021 ice storms caused an estimated $99 million of incremental costs through June 30: $36 million capitalized and $63 million in operating costs. PGE had deferred $52 million of storm operating costs, subject to OPUC review and recovery approval.
- Oregon’s HB 2021, signed July 19, sets clean-electricity emissions-reduction targets of 80% by 2030, 90% by 2035, and 100% by 2040 for covered entities. PGE’s stated strategy targets an 80% reduction by 2030 and zero emissions associated with power served to customers by 2040.
Outlook, management commentary, and risks
- Management’s strategy refers to average diluted EPS growth of 4%–6%. For 2021, PGE estimated operating cash flow of $575–$625 million and capital expenditures of $700 million, excluding allowance for funds used during construction. It expected to fund capital needs with operating cash, debt issuance, and short-term borrowing as needed.
- PGE’s July 2021 rate-case filing sought an overall average customer-price increase of approximately 3.9% for 2022, including a 2.0% increase associated with higher expected power costs. The requested case assumes a 9.5% return on equity and a $5.7 billion rate base; OPUC review was ongoing, with a final order expected by April 2022.
- Recovery of storm deferrals is uncertain and subject to OPUC prudency review. PGE also disclosed COVID-19 deferrals of $16 million and wildfire-response deferrals of $30 million at June 30; management considered recovery probable but acknowledged the regulator could disallow some or all amounts.
- PGE is a potentially responsible party in the Portland Harbor Superfund matter. The EPA’s 2017 remedy estimate was $1.7 billion for the site, but PGE said its allocation and potential liability could not yet be reasonably estimated and could be material to its financial position. The PHERA mechanism may mitigate impacts, subject to regulatory conditions.
- Investigations by the CFTC, SEC, and FERC arose from PGE’s previously disclosed 2020 energy-trading losses. The company said it was cooperating and could not predict the investigations’ scope or outcome. Related shareholder derivative suits were in early stages and their potential losses could not be estimated. A securities class-action settlement for $6.75 million was subject to court approval; PGE expected insurance to pay.
- Colstrip co-owner disputes and litigation concerning Montana legislation could affect PGE’s 20% interest in Units 3 and 4; outcomes and potential losses were not estimable. PGE also disclosed that a proposed hydroelectric PPA modification could add about $140 million of lease liability and right-of-use asset if conditions are met.
- Key operating and financial risks include wholesale power and fuel prices, weather and wildfire exposure, regulatory cost recovery, capital-market access, and potential collateral demands. A below-investment-grade downgrade could trigger additional collateral requests; estimated additional collateral under a dual-agency downgrade was $150 million at June 30, 2021.
Investor verification checklist
- Track the outcome and recovery treatment of the $52 million ice-storm deferral and other regulatory balances, including COVID-19 and wildfire costs.
- Review the 2022 rate-case decision, requested price changes, and assumptions for rate base, capital structure, and return on equity.
- Monitor the trading-loss investigations, derivative exposures and collateral requirements, and the status of the securities settlement and derivative lawsuits.
- Assess the eventual Portland Harbor allocation and any resulting liability, as well as Colstrip litigation and ownership decisions.
- Compare actual operating cash flow and capital spending with 2021 estimates, and monitor liquidity given $17 million of cash at quarter-end.