Business context and reporting period
Portland General Electric Company (PGE) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017, compared with the same periods in 2016. PGE is a vertically integrated electric utility serving approximately 873,000 retail customers in Oregon; it also buys and sells power and natural gas in wholesale markets.
Financial results and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2017 / 2016 | $515m / $484m (+6%) | $1,494m / $1,399m (+7%) |
| Gross margin, 2017 / 2016 | $331m / $304m; 64% / 63% of revenue | $1,051m / $944m; 70% / 67% of revenue |
| Operating income, 2017 / 2016 | $77m / $64m; 15% / 13% operating margin | $268m / $227m; 18% / 16% operating margin |
| Net income, 2017 / 2016 | $40m / $34m | $145m / $132m |
| Diluted EPS, 2017 / 2016 | $0.44 / $0.38 | $1.62 / $1.49 |
Nine-month net margin was 10%, compared with 9% in 2016; quarterly net margin was 8%, compared with 7%. PGE declared dividends of $0.34 per share for the third quarter, versus $0.32 a year earlier. Nine-month dividends declared were $1.00 per share, versus $0.94.
- Cash flow: Nine-month operating cash flow was $519m, up from $497m. Capital expenditures were $369m, down from $454m; operating cash flow less capital expenditures was $150m. Cash and cash equivalents ended the period at $89m, versus $6m at year-end 2016.
- Debt and liquidity: Long-term debt was $2.377bn, including $100m classified as current. PGE had $500m of unused capacity under its revolving credit facility and $54m of letters of credit outstanding under separate facilities. Its debt-to-total-capital ratio under the credit agreement was 51.3%, below the 65% covenant limit; its common equity ratio was 50.3%.
- Balance sheet: Total assets were $7.759bn and total liabilities were $5.357bn at September 30, 2017, compared with $7.527bn and $5.183bn, respectively, at December 31, 2016.
Material changes versus the prior comparable period
- Higher retail deliveries supported revenue and earnings: nine-month retail deliveries rose 5.9%, reflecting weather, 1.3% customer growth, and stronger industrial demand. Third-quarter retail deliveries increased 8.5%; unusually warm summer weather contributed to residential usage.
- Nine-month purchased power and fuel expense fell $12m, as average variable power cost per MWh declined 5%, partly offset by higher system load. Nine-month actual net variable power costs were $14m above baseline, but PGE forecast the full-year result to remain within the PCAM deadband, implying no expected 2017 customer collection or refund.
- Operating costs increased in several areas. Nine-month generation, transmission and distribution expense rose $36m, including higher Carty operating costs and storm restoration costs; depreciation and amortization increased $13m and interest expense increased $8m.
- Wind generation was weaker: PGE-owned wind output fell 18% for the first nine months, increasing replacement-power needs. More favorable hydro conditions partly offset this, with hydro energy received up 13%.
- Nine-month operating cash flow increased $22m, while investing cash outflow declined $85m, largely because Carty construction was completed in 2016. Financing cash flow shifted from a $41m source in 2016 to a $67m use in 2017.
Outlook, management commentary, risks and unusual items
- 2017 funding outlook: PGE expected operating cash flow of $515m-$565m and capital expenditures of $533m, excluding allowance for funds used during construction. It planned up to $225m of debt issuance to help fund capital needs and debt maturities. Of a $225m first mortgage bond agreement at 3.98%, $75m was issued in August and a further $150m was expected in November. A remaining $100m term loan was due by November 30, 2017.
- Rate case: Settlements in PGE’s 2018 general rate case proposed an approximately $20m annual increase in revenue requirement, compared with PGE’s initial $100m request. The proposed terms included a 9.5% return on equity and a $4.5bn rate base. OPUC approval was pending; new prices were expected January 1, 2018.
- Resource planning: The OPUC acknowledged a 2021 capacity need of 561 MW, including 240 MW dispatchable. PGE was pursuing capacity procurement and revised renewable-resource plans. Boardman is expected to cease coal-fired operations at the end of 2020; Oregon’s clean-electricity law raises renewable portfolio requirements over time.
- Carty cost overrun and litigation: Carty’s OPUC-approved cost was $514m, while PGE had capitalized $637m by September 30, 2017. Incremental depreciation, interest and legal costs totaled $12m for the first nine months and were estimated at about $14m for full-year 2017. PGE is pursuing recovery from the former contractor and sureties; the sureties denied liability. The OPUC had not determined whether incremental costs would be recoverable, and contractor claims against PGE include $117m and $44m.
- Environmental and legal contingencies: PGE could not reasonably estimate its share of Portland Harbor cleanup costs; the company said its share was probable and costs could be material. The EPA’s estimated site remedy cost was $1.7bn before discounting. PGE also faced an appeal in the Trojan customer class actions, with potential loss beyond amounts previously recorded not estimable, and Clean Water Act claims concerning the Pelton/Round Butte project; settlement discussions were underway.
- Other operating exposures: 2017 storm restoration costs exceeded the existing $2m annual collection by $10m as of the filing; recovery of incremental costs was uncertain and no deferral had been recorded. A $7m Gresham utility-fee regulatory asset was subject to an unresolved recovery request. PGE also identified potential collateral calls if its debt rating fell below investment grade.
- Management cited weather, wholesale power and fuel prices, generation outages, regulatory and environmental developments, capital-market access, project execution, cyber risks, and natural disasters among factors that could cause actual results to differ from expectations. The filing reported no material change to previously disclosed risk factors or market risks.
Important facts for investors to verify
- Whether the OPUC approved the 2018 rate-case settlement and the final revenue requirement and customer prices.
- Whether the expected $150m bond tranche was issued and the remaining $100m term loan was repaid or refinanced by its November 2017 maturity.
- Developments in Carty litigation and the OPUC’s treatment of the $123m difference between capitalized cost and approved cost, including any potential disallowance or recovery.
- Any updated estimate or allocation of PGE’s Portland Harbor remediation and natural-resource damages liabilities.
- Actual 2017 cash flow, capital spending, storm costs and PCAM outcome compared with management’s forecasts and the applicable recovery mechanisms.
- Progress toward securing the identified 2021 capacity need and meeting renewable-resource requirements.