Portland General Electric Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. PGE is a vertically integrated Oregon electric utility serving approximately 865,000 retail customers. Interim results are seasonal and may not indicate full-year performance.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $530 million | $487 million |
| Gross margin | $389 million (73% of revenue) | $338 million (69%) |
| Operating income | $123 million (23%) | $99 million (20%) |
| Net income | $73 million | $61 million |
| Diluted EPS | $0.82 | $0.68 |
| Operating cash flow | $170 million | $161 million |
| Capital expenditures | $114 million | $131 million |
| Dividends declared per share | $0.32 | $0.30 |
Revenue rose $43 million, led by a $40 million increase in retail revenue. Retail energy deliveries increased 6.2%, largely because of colder weather; heating degree-days were 37% above Q1 2016 and 16% above average. Weather-adjusted deliveries declined 3.9%. Purchased power and fuel expense fell $8 million as average variable power costs declined, partly offset by higher system load.
Operating expenses increased overall, including higher generation, transmission and distribution costs (up $15 million, including $7 million of storm restoration costs and $5 million for Carty operations) and higher administrative costs (up $7 million, including increased Carty legal expense). The effective income tax rate was 24.0%, compared with 21.8%.
Financial position and liquidity
- At March 31, 2017, cash was $31 million, total assets $7.612 billion, and total equity $2.387 billion.
- Total long-term debt was $2.350 billion, including $150 million classified as current. Debt-to-total capitalization under the credit agreement was 50.6%; the covenant limit is 65%.
- PGE had no revolver borrowings or commercial paper outstanding and had $500 million of unused capacity under its revolving credit facility, which expires in November 2020. Separate letter-of-credit facilities had $56 million outstanding.
- Operating cash flow increased $9 million year over year. Investing cash outflow was $113 million and financing cash outflow was $32 million; cash increased $25 million during the quarter.
Outlook, material developments and risks
- 2017 funding: Management estimates capital expenditures of approximately $585 million and operating cash flow of $425–$475 million. It expects to fund 2017 capital needs and $150 million of debt maturities with operating cash and up to approximately $450 million of debt issuance, with commercial paper available as needed.
- Rates: PGE filed a 2018 general rate case seeking a $100 million annual revenue-requirement increase, approximately 5.6% in customer prices. The request assumes a 9.75% return on equity, a 50/50 debt-equity capital structure and $4.6 billion rate base. Review was expected through 2017, with requested prices effective January 1, 2018; approval and final amounts remain uncertain.
- Carty: The plant entered service in July 2016. PGE had capitalized $636 million by March 31, versus $514 million authorized for customer-price recovery, and estimated total cost at approximately $640 million. PGE is pursuing claims against the contractor and sureties and has requested regulatory deferral/recovery of incremental costs. No loss was recorded because disallowance was considered less than probable; recovery of excess costs is not assured. Incremental Carty costs increased current-period expense.
- Power supply and weather: Management expected 2017 hydro generation to exceed forecast levels and wind generation to fall short. It estimated annual net variable power costs below baseline but within the PCAM deadband, with no customer collection or refund expected at that time. Weather, fuel and wholesale prices, generation availability, and collateral requirements remain important earnings and liquidity risks.
- Storm costs: Q1 storm restoration costs were $5 million and used the 2017 $2 million storm collection. A significant early-April storm added approximately $6 million of restoration expense. PGE sought authority to defer certain incremental 2017 costs but had not recorded a deferral; recovery was uncertain.
- Environmental and legal contingencies: PGE could not reasonably estimate its share of Portland Harbor cleanup costs; the EPA’s selected remedy had an estimated total cost of $1.7 billion, but that is not PGE’s liability estimate. PGE said its share could be material and it would seek insurance and regulatory recovery. A Clean Water Act suit concerning the Pelton/Round Butte project was proceeding after the court denied PGE’s motion to dismiss; the potential outcome could not be determined. Trojan-related customer class-action claims remained on appeal, with any additional loss not estimable.
- Resource planning and regulation: PGE’s updated resource plan reduced its identified 2021 capacity need to approximately 565 MW. A 10-year Wells hydroelectric power purchase agreement is expected to reduce that need by 135 MW. Oregon’s clean electricity law increases renewable portfolio requirements and restricts coal costs in Oregon rates after 2030, subject to a Colstrip exception through 2035.
Important facts for investors to verify
- Whether the OPUC approves the requested 2018 rate increase and any recovery of Carty costs above the $514 million authorized amount.
- Progress and potential recoveries in the Carty contractor and surety litigation, including the effect of the stay and appeals.
- How Portland Harbor cleanup costs are allocated to PGE, and whether insurance or regulatory recovery is available.
- Whether storm restoration expenses are deferred or recovered, including costs from the April 2017 storm.
- Whether forecast operating cash flow, capital spending and planned debt issuance are sufficient to meet funding needs while maintaining investment-grade credit and liquidity.
- Whether weather-normalized demand, wind and hydro generation, and power costs differ materially from management’s expectations.