Portland General Electric Company — Q2 2019 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and six months ended June 30, 2019, compared with the same periods in 2018. PGE is a vertically integrated Oregon electric utility serving approximately 888,000 retail customers and operates as a single segment.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $460 million | $449 million | $1,033 million | $942 million |
| Gross margin (revenue less purchased power and fuel) | $355 million | $345 million | $749 million | $708 million |
| Operating income | $57 million | $80 million | $168 million | $180 million |
| Net income | $25 million | $46 million | $98 million | $110 million |
| Diluted EPS | $0.28 | $0.51 | $1.09 | $1.23 |
| Operating cash flow | Not provided separately for Q2 | $314 million | $338 million |
Q2 revenue increased 2%, but net income fell 46%. For the first half, revenue rose 10% while net income declined 11%. First-half gross margin improved, but operating income fell as other operating expenses increased. Q2 operating expenses rose to $403 million from $369 million; the filing attributes higher costs to maintenance, vegetation management, labor and benefits, IT, depreciation and other items. The effective tax rate was 10.7% for Q2 and 12.5% for the first half.
First-half retail energy deliveries increased 2.4% (0.3% after adjusting for weather). Industrial deliveries were notably stronger, while Q2 residential and commercial usage was affected by milder weather. Lower hydro and wind generation, higher purchased-power costs and lower Q2 wholesale sales prices and volumes weighed on results. For the first half, purchased power and fuel expense rose 21% to $284 million, partly offset by increased company generation and lower total system load.
Financial position, cash flow and liquidity
- At June 30, 2019, cash was $11 million, down from $119 million at year-end 2018. First-half operating cash flow was $314 million; capital expenditures were $271 million; dividends paid were $65 million.
- Long-term debt was $2.377 billion, net of unamortized debt expense; short-term commercial paper was $17 million. PGE issued $200 million of 4.30% first mortgage bonds due 2049 and used the proceeds toward repayment of $300 million of maturing debt.
- The $500 million revolving credit facility had $483 million of unused capacity. PGE reported a 50.3% debt-to-total-capital ratio against a 65% covenant limit and a 49.9% common equity ratio. Debt was rated investment grade, with stable Moody’s and positive S&P outlooks.
- Balance-sheet finance lease obligations were $154 million; operating lease liabilities were $40 million. Total liabilities were $5.455 billion and shareholders’ equity was $2.542 billion.
Outlook, material developments and risks
- Management forecast 2019 capital expenditures of $620 million, cash from operations of $550–$600 million, and debt issuance of up to $430 million to help fund capital needs. No earnings guidance was provided in the supplied filing text.
- Planned capital investment includes the Wheatridge renewable project and a new Integrated Operations Center, approved in July 2019 at an estimated $200 million, excluding AFDC. The 2019 Integrated Resource Plan proposed a 2020 renewable solicitation and additional capacity procurement.
- Management expected 2020 power costs to rise. For 2019, hydro and wind output were each expected to fall short of AUT projections by up to 10%; actual first-half net variable power costs were $6 million above baseline, but the full-year forecast was within the PCAM deadband, with no customer refund expected.
- Coal transition remains a key issue: Boardman was scheduled to stop coal-fired operations by the end of 2020. Colstrip Units 1 and 2 owners announced closure at year-end 2019; PGE owns 20% of Units 3 and 4 and was evaluating its ongoing investment.
- Material contingencies include Portland Harbor Superfund remediation: PGE expects to bear a share, but cannot reasonably estimate its liability; costs could be material. Recovery may be available under the PHERA mechanism, subject to conditions. A pending appeal remains in the Trojan customer class actions, with potential loss not estimable. The Deschutes River Alliance appealed a ruling in PGE’s favor; the company said it could not predict the outcome.
- Other risks include volatile wholesale power and gas prices, weather and renewable-resource variability, plant outages, regulatory and environmental changes, major capital project execution, credit downgrades and potential collateral calls. A coal supplier filed for Chapter 11 on July 1, 2019; PGE said alternative supply could be arranged if needed.
Most important facts for investors to verify
- Whether higher operating and purchased-power costs continue to pressure earnings despite revenue growth.
- Actual 2019 operating cash flow, capital spending and financing versus management’s estimates.
- Developments in Portland Harbor cost allocation and recovery, and the Trojan and Deschutes litigation appeals.
- Hydro and wind generation, wholesale market prices, and the resulting PCAM treatment and customer-price effects.
- Colstrip exposure and decisions, Boardman’s planned closure, and progress and cost control on Wheatridge and the Integrated Operations Center.