Portland General Electric Company (PGE) — Q3 2019 Form 10-Q
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2019, compared with the same 2018 periods. PGE is a vertically integrated electric utility serving approximately 892,000 retail customers in Oregon; it also buys and sells power and natural gas. Results are seasonal and can be affected by weather, generation, wholesale prices, and fuel costs.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $542m | $525m | $1,575m | $1,467m |
| Gross margin (revenue less purchased power and fuel; company-defined non-GAAP) | $377m | $339m | $1,126m | $1,047m |
| Income from operations | $88m | $91m | $256m | $271m |
| Net income | $55m | $53m | $153m | $163m |
| Diluted EPS | $0.61 | $0.59 | $1.70 | $1.82 |
| Operating cash flow | Not presented by quarter | $502m | $536m | |
| Capital expenditures | Not presented by quarter | $407m | $401m |
Gross margin was approximately 70% of revenue in Q3 2019 versus 65% in Q3 2018, and approximately 71% in both nine-month periods. Operating income was approximately 16% of revenue in Q3 2019 versus 17% in Q3 2018, and approximately 16% versus 18% for the nine-month periods.
At September 30, 2019, cash was $11m, current assets $416m and current liabilities $514m. Long-term debt, net of unamortized debt expense, was $2,378m, including $50m classified as current. Total liabilities were $5,590m and shareholders’ equity $2,564m. PGE had $500m of unused revolving credit capacity; no revolving-credit borrowings or commercial paper were outstanding. Its debt-to-total-capital ratio under the credit agreement was 50.2%, below the 65% covenant limit. The common equity ratio was 50.3%.
Material changes versus prior comparable periods
- Q3 net income rose $2m despite operating income declining $3m. Gross margin increased $38m, primarily as purchased power and fuel expense fell $21m, reflecting lower average power costs and a greater contribution from company-owned generation. Operating expenses increased $41m, including higher employee benefits, distribution and wildfire mitigation costs, and the absence of a $10m Carty litigation settlement benefit recorded in 2018.
- Nine-month net income declined $10m. Revenue increased $108m, including higher customer prices and wholesale and other operating revenues, but gross margin’s $79m increase was more than offset by $94m of higher operating expenses. Purchased power and fuel expense increased $29m as average variable power costs rose; lower hydro and wind output and regional gas supply constraints contributed.
- Nine-month operating cash flow fell $34m to $502m. Investing cash use increased to $406m, while financing cash use was $204m, including $300m of debt repayments, $200m of new debt proceeds, and $99m of dividends. Cash declined $108m from the start of the year.
- Retail deliveries increased 0.5% for the nine months but declined 3.2% in Q3, mainly reflecting milder summer weather. Company generation supplied 87% of retail load for the nine months versus 75% in 2018; hydro receipts declined 22% and company wind generation declined 9%.
Outlook, management commentary, risks and unusual items
- Management expected 2019 capital expenditures of $620m, excluding allowance for funds used during construction, and operating cash flow of $475m–$525m. Planned funding included debt issuance of up to $520m and commercial paper as needed. The cash-flow outlook was reduced primarily because $62m of pension contributions planned for 2020–2021 were accelerated into 2019.
- Estimated capital expenditures were $865m for 2020, including planned spending on the Wheatridge renewable facility and Integrated Operations Center. Wheatridge’s wind component was expected to be operational by December 2020. The 2019 resource plan proposed a 2020 renewable solicitation and a 2021 non-emitting capacity solicitation; the OPUC order on the plan was expected in Q1 2020.
- For 2019, actual net variable power costs were $5m above baseline through September, but management estimated full-year costs would remain within the PCAM deadband, with no customer refund or collection expected. The 2020 power-cost update indicated costs were expected to rise; the final filing was scheduled for November 15, 2019.
- After quarter-end, PGE issued $110m of 3.34% first mortgage bonds due 2049 and agreed to issue a further $160m due 2050. A portion of the first tranche was used to redeem $50m of 6.75% bonds. In Q3, renewal of the Trojan spent-fuel facility license through 2059 increased the related asset retirement obligation by $69m.
- Portland Harbor cleanup exposure is probable, but PGE said it could not reasonably estimate its share; costs could be material to financial position. The company expects to seek recovery through the OPUC-approved environmental mechanism, subject to reviews and recovery conditions. Trojan customer class-action claims seek $260m plus interest; the appeal remained pending and any potential loss could not be estimated. The Deschutes River Alliance case was appealed, and PGE could not predict the outcome.
- Oregon’s new corporate activity tax applies beginning in 2020. PGE was evaluating its effect and planned an OPUC filing seeking an estimated $7m annual recovery in customer prices. The Boardman coal supplier filed for bankruptcy; PGE said it would arrange alternative supply if needed. PGE also cited weather and natural disasters, plant outages, commodity-price volatility, regulatory and environmental actions, capital-project execution, and credit access among key risks.
- Other unusual items included a $2m retiree medical plan curtailment gain and a $12m reserve recorded in 2018 for deferred customer-information-system costs, whose recovery remains uncertain. The OPUC denied PGE’s request to defer certain 2017 storm-restoration costs; the existing reserve meant no current-period earnings impact.
Important facts for investors to verify
- Whether full-year operating cash flow and capital spending meet management’s stated ranges, particularly after accelerated pension contributions.
- Actual 2019 power costs and the resulting PCAM outcome, and the final 2020 power-cost update and customer-price effects.
- OPUC decisions and recovery prospects for the corporate activity tax, Portland Harbor costs, and customer-information-system deferrals.
- Developments in the Portland Harbor allocation and Trojan and Deschutes litigation, including any change in the ability to estimate potential losses.
- Progress, cost and timing of Wheatridge, the Integrated Operations Center, and planned capacity and renewable procurements.
- Liquidity, debt issuance, and potential collateral needs if energy-market exposures rise or credit ratings fall below investment grade.