Portland General Electric Company — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited results. PGE is a vertically integrated electric utility serving approximately 872,000 retail customers in Oregon.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $449 million | $428 million | $979 million | $915 million |
| Gross margin | $331 million; 74% | $302 million; 71% | $720 million; 74% | $640 million; 70% |
| Operating income | $68 million | $64 million | $191 million | $163 million |
| Net income | $32 million | $37 million | $105 million | $98 million |
| Diluted EPS | $0.36 | $0.42 | $1.18 | $1.10 |
| Net income margin | 7% | 9% | 11% | 11% |
For the six months, operating cash flow was $333 million, capital expenditures were $245 million, and cash dividends paid were $57 million. Cash increased from $6 million at year-end 2016 to $33 million at June 30, 2017. Long-term debt was $2.35 billion, including $150 million classified as current; no long-term debt transactions occurred in the first half. The debt-to-total-capital ratio under the credit agreement was 51.0%, below its 65% covenant limit. PGE had $500 million of unused revolving credit capacity.
Dividends declared were $0.34 per share in Q2 2017, versus $0.32 in Q2 2016. The common equity ratio was 50.4% at June 30, 2017.
Changes versus comparable periods
- Q2 revenue rose 5%, but net income fell 14% and diluted EPS declined from $0.42 to $0.36. Management cited storm restoration costs, reduced production tax credits from lower wind generation, and ongoing Carty-related operating costs; higher deliveries and gross margin partly offset these pressures.
- Six-month revenue increased 7%, net income increased 7%, and diluted EPS rose from $1.10 to $1.18. Higher deliveries, weather-related demand, customer growth, and lower net variable power costs supported results.
- Retail energy deliveries increased 4.6% in the first half, while weather-adjusted deliveries decreased 2.1%. PGE said residential use per customer continued a long-term decline.
- Six-month generation and system mix shifted: PGE-owned generation supplied 49% of retail load versus 54% a year earlier. Lower wind output and thermal generation were partly offset by stronger hydro conditions; purchased power increased.
- Six-month operating cash flow was $333 million versus $338 million. Capital spending fell to $245 million from $319 million, mainly following Carty’s completion.
Outlook, capital plans, and management commentary
- PGE expects 2017 capital expenditures of approximately $550 million, excluding allowance for funds used during construction, and forecasts 2017 cash from operations of $515 million to $565 million. It expects to fund capital needs and $150 million of current debt maturities with operating cash, debt securities of up to $300 million, and commercial paper as needed.
- After quarter-end, PGE expected to issue $225 million of First Mortgage Bonds: $75 million in August and $150 million in November, at a stated 3.98% interest rate and with maturities in 2048 and 2047, respectively.
- The 2018 general rate case requests a $100 million annual revenue-requirement increase, about 5.6% in customer prices, based on a 2018 test year. The requested return on equity is 9.75%; new prices were expected January 1, 2018, subject to OPUC review and approval.
- For 2017, management estimated actual net variable power costs would remain within the PCAM deadband; therefore, no customer collection or refund was expected under that mechanism.
- Management estimated Carty-related incremental cost-of-service impacts at approximately $14 million for full-year 2017. PGE’s 2016 resource plan identifies remaining 2021 capacity needs of 561 MW and a transition away from Boardman coal-fired operations at the end of 2020.
Material risks, contingencies, and unusual items
- Carty: Capitalized project cost was $635 million versus the $514 million approved for customer pricing. PGE is pursuing claims against the contractor and sureties, including claims exceeding $200 million against the contractor; the contractor asserted claims of approximately $117 million and $44 million. A Ninth Circuit ruling gave the arbitration panel authority to decide which parties and claims belong in arbitration; PGE sought rehearing. PGE had not recorded a loss, stating disallowance of excess costs was less than probable, but regulatory recovery is not assured.
- Portland Harbor: The EPA’s selected cleanup remedy was estimated at $1.7 billion before discounting; PGE’s allocation is unresolved. The company said it probably will share in costs but could not reasonably estimate its liability, which could be material. An OPUC-approved mechanism permits deferral and potential recovery of eligible environmental expenditures, subject to reviews and an earnings test.
- Other proceedings: Trojan investment-recovery class actions remained on appeal; management said an additional loss was reasonably possible but could not estimate an amount. The Deschutes River Alliance Clean Water Act case involved novel claims; settlement discussions and a stay were reported. PGE also could not predict recovery of $7 million in Gresham utility-tax costs, after OPUC staff opposed recovery.
- Liquidity and market exposure: A below-investment-grade downgrade could prompt additional collateral demands. Estimated additional collateral after a single-agency downgrade was $77 million at June 30; after a dual-agency downgrade, approximately $164 million. Commodity derivatives showed $204 million of liabilities and $7 million of assets at quarter-end; regulatory accounting defers certain related gains and losses.
- Other risks include weather and generation availability, wholesale power and fuel prices, capital project execution, environmental regulation, credit and interest-rate conditions, and legal and regulatory outcomes. PGE reported no material change in risk factors from its 2016 Form 10-K.
Most important facts for investors to verify
- Whether the OPUC permits recovery of Carty costs above the $514 million approved amount, and the outcome of PGE’s claims against the contractor and sureties.
- How PGE’s Portland Harbor liability is allocated and whether insurance or regulatory recovery offsets cleanup costs.
- Whether the 2018 rate case delivers the requested revenue increase and when approved customer prices take effect.
- Whether 2017 operating cash flow, capital spending, debt issuance, and liquidity develop in line with management’s estimates.
- How wind and hydro output, weather, and purchased-power costs affect earnings and the PCAM position in the second half of 2017.
Controls: Management concluded disclosure controls were effective as of June 30, 2017, with no material change in internal control over financial reporting reported for the quarter.