Portland General Electric Company — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. PGE is a vertically integrated electric utility serving Oregon; it reported 848,600 retail customers at quarter-end. Financial statements are unaudited.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $450 million | $423 million | $923 million | $916 million |
| Operating income | $72 million | $58 million | $157 million | $156 million |
| Net income | $35 million | $35 million | $85 million | $93 million |
| Diluted EPS | $0.44 | $0.43 | $1.07 | $1.16 |
| Gross margin | 67% | 66% | 67% | 64% |
| Net margin | 8% | 8% | 9% | 10% |
- Q2 revenue rose 6%, primarily on higher retail deliveries and prices. Net income was flat: higher deliveries and new resources in customer rates were offset by less favorable net variable power costs than in Q2 2014.
- First-half revenue increased 1%, while net income fell 9%. Warmer weather reduced residential deliveries 4.5%; growth in industrial deliveries (9.6%) and commercial deliveries (1.3%) partly offset the decline. Lower first-half power costs helped, but did not prevent the earnings decline.
- Q2 purchased power and fuel expense rose 4% to $148 million; first-half expense fell 5% to $309 million. First-half operating income was nearly unchanged as higher operating expenses offset improved gross margin.
Cash flow, balance sheet and financing
- First-half operating cash flow was $248 million, down from $302 million. Investing used $238 million versus $494 million, reflecting lower capital spending and a $50 million distribution from the nuclear decommissioning trust; financing used $15 million versus providing $182 million. Cash ended June at $122 million.
- At June 30, total assets were $7.198 billion, total liabilities $4.977 billion, and equity $2.221 billion. Long-term debt, including current maturities, was $2.259 billion. Debt-to-total capitalization under the credit agreement was 50.4%; the covenant limit is 65%.
- PGE had a $500 million revolving facility, $462 million available, and no outstanding borrowings or commercial paper. The company reduced facility capacity from $700 million in March. It also had $59 million of letters of credit under separate facilities.
- In the first half, PGE issued $145 million of first mortgage bonds and repaid $387 million of long-term debt. It raised $271 million net by issuing 10.4 million common shares under its equity forward sale agreement. The remaining $55 million of bank loans was repaid July 10, 2015.
- Quarterly dividends declared were $0.30 per share, up from $0.28 in Q2 2014. The company’s common equity ratio was 49.6% at June 30, compared with 43.3% at year-end 2014.
Outlook, developments and risks
- Capital and Carty: PGE forecast 2015 capital expenditures of approximately $598 million, including $165 million for the 440 MW Carty gas plant. Carty was on budget at an estimated total cost of $450 million, excluding allowance for funds used during construction, and was expected online in Q2 2016. PGE forecast 2015 operating cash generation of $455–$495 million and planned to use operating cash, debt issuance of up to $250 million, and the equity proceeds to fund capital spending and debt maturities.
- Rates: The 2015 rate case produced an authorized $15 million annual revenue increase, about 1%, effective January 1, 2015. In the 2016 rate case, PGE revised its requested net annual revenue requirement increase from $66 million to $41 million after updates and stipulations. A settlement in principle covered remaining revenue-requirement matters except one power-cost issue; OPUC approval was pending, with a final order expected by mid-December 2015. Proposed customer prices were expected to decrease initially in January 2016 and rise when Carty entered service.
- Power and weather: Through June, hydro generation was 6% below AUT projections and wind generation 27% below projections. PGE expected hydro to remain below projected levels for 2015. Forecast 2015 net variable power costs were below baseline but within the adjustment mechanism’s deadband, so no customer collection or refund was expected under the PCAM.
- Environmental obligations: A new coal-combustion-residuals rule is expected to require Colstrip pond upgrades or closure. PGE recorded a $15 million increase in its Colstrip asset-retirement obligation in Q2 and plans to seek recovery in customer prices. PGE preliminarily expected no material effect at Boardman.
- Contingencies: Trojan-related class actions seek $260 million plus interest; management considers a loss reasonably possible but could not estimate an amount. Portland Harbor remediation could also result in a loss, but PGE could not estimate its liability; draft cleanup alternatives ranged from $169 million to $1.8 billion, without allocation among responsible parties. The Colstrip Clean Air Act case remained pending, with trial scheduled for November 2015; potential loss could not be determined. PGE said material loss from the Pacific Northwest refund matter was not expected under current FERC orders, though appeals remained pending.
- Market and funding risks: Commodity-price volatility and credit downgrades could trigger collateral demands. At June 30, estimated additional collateral needs were approximately $108 million after a single-agency downgrade or $215 million after a dual-agency downgrade. Other disclosed risks include weather and resource availability, capital-market access, regulatory decisions, environmental rules, project execution, and litigation.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material changes to the company’s previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether the OPUC approves the 2016 rate-case settlement and how the remaining power-cost issue affects customer rates.
- Carty’s cost, schedule, completion and eventual rate recovery; also whether projected 2015 capital spending and cash generation are achieved.
- Actual hydro and wind output, weather-normalized demand, and net variable power costs relative to the PCAM deadband.
- Developments in Trojan, Portland Harbor and Colstrip proceedings, including potential liabilities and recovery of environmental costs from customers.
- Debt and equity funding plans, credit ratings, and collateral requirements under adverse commodity-price or downgrade scenarios.