2023-05-22 16:32:00 ET
Summary
- Portland General Electric is expected to benefit from continued strong growth in the industrial sector.
- General rate case and the transition to clean energy should be growth tailwinds for the company in the coming years.
- A lower than historical P/E ratio, along with good growth prospects, makes me give this stock a buy rating.
Investment Thesis
Portland General Electric Company (POR) is poised to benefit from load growth in FY2023, driven by continued strong growth in the industrial sector. Furthermore, the general rate case and the ongoing transition to clean energy are expected to provide a significant boost to POR's growth trajectory in the coming years. Considering the good growth prospects along with the lower than-historical P/E ratio makes me give a buy rating on this stock.
2023 Load Growth
Portland General Electric’s retail customers are classified as residential, commercial, and industrial. Residential customers accounted for 38% of retail deliveries in 2022, commercial 34% and industrial 28%. The management of POR expects 2.5% to 3% (weather-adjusted) load growth in FY2023, driven by continued strong growth in the industrial sector . In order to address the supply chain constraints in the semiconductor industry, many companies across the U.S. have started to expand their manufacturing facilities. POR is poised to benefit from this situation as approximately 15% of the total semiconductor manufacturing in the United States is conducted within its service territory. Consequently, I believe this should help the company generate increased revenue Y/Y in FY2023. On the contrary, the residential market is expected to face some challenges due to less usage of electricity by its customers. With the transition to a post-COVID environment, individuals are returning back to their offices for work, leading to a decrease in their electricity usage. This shift is expected to impact POR's residential sector in the coming quarters.
General Rate Case
Recently, POR filed a general rate case ((GRC)) with the Oregon Public Utility Commission (OPUC) to review its cost of service and approve new prices effective from January 2024. The GRC filed a request for recovery of essential capital investments of nearly $859 million and upgrading the grid to improve resiliency and capability to deliver safe, reliable and clean electricity to customers. The requested price increase reflects a rate base of $6.3 billion, an increase of $859 million or 16%. Additionally, the company also proposed modification of the Power Cost Adjustment Mechanism (PCAM). The OPUC has granted authorization to Portland General Electric for a Power Cost Adjustment Mechanism (PCAM), enabling them to share a portion of net variable power costs (NVPC), such as fuel costs, with customers. Through PCAM, customer prices can be adjusted annually to absorb a portion of the difference between the forecasted NVPC included in the customer price (baseline NVPC) and the actual NVPC for the year. This adjustment is applicable only if the difference exceeds a prescribed "deadband" limit which ranges from $15 million below to $30 million above the baseline NVPC. However, in the recent GRC filing, the company seeks approval to remove the deadband limitation from its PCAM. Additionally, the company also proposed a structure with 90/10 sharing of power cost variances. Therefore, I believe the increase in the general rate of POR services along with a favourable PCAM structure should benefit the company in the coming years.
Clean Energy Transition
POR is taking meaningful steps to achieve the legislatively enacted target of an 80% reduction in greenhouse gas ((GHS)) emissions by 2030. For this, the company aims to remove the use of coal in electricity generation and replace it with renewable sources of energy like wind energy and batteries. To date, POR has secured 311 MegaWatt (MW) of renewable generation from its Clearwater Wind project and 400 MW of non-emitting dispatchable capacity from Seaside & Troutdale batteries. Moreover, the company requires 2300 to 3300 MW of additional non-emitting resources to be procured to meet the 2030 target. In light of this, the company has decided to increase its capital expenditures from 2023 to 2025. The allocated amounts are increased by $115 million, $180 million, and $210 million for each respective year. These investments primarily aim to support the development of the new Seaside project. Oregon State has established a Renewable Adjustment Clause (RAC) mechanism that allows the company to recover the investments made in renewable energy through an increase in retail customer prices, outside of a general rate case. Hence the capital investments made in renewable energy should be a growth tailwind for POR in the coming years.
Proven Dividend Growth
Throughout the years, Portland General Electric has consistently demonstrated dividend growth, achieving a compound annual growth rate ((CAGR)) of 5.5% from 2019 to 2023 and 6% CAGR from 2014 to 2023. This growth aligns with the company's long-term objective of achieving a dividend growth rate between 5% and 7%. Furthermore, POR maintains an appealing target payout ratio ranging from 60% to 70%. This indicates the company's strong commitment towards maximizing shareholder value.
Risk
OPUC regulates the prices that POR charges to its customers, which is very crucial to the company’s operating income, financial position, liquidity and credit ratings. The regulated prices help POR recover a wide range of expenses associated with its business operations, including capital projects and compliance costs related to legislative and regulatory requirements. However, there is a possibility that regulators may reject the recovery of costs they deem imprudently incurred. Such a scenario could have a detrimental effect on the company and its stock performance.
Valuation & Conclusion
Portland General Electric is currently trading at 18.50x FY2023 consensus EPS estimate of $2.67 and 16.30x FY2024 consensus EPS estimate of $3.03 which is a discount to its 5-year average P/E ratio of 19.91x. Moreover, upon comparison with the sector median of 17.86, the company seems to be trading at a premium. In my assessment, I find that the company presents compelling opportunities in the coming years, including load growth, the transition to renewable energy, and the general rate case. Additionally, the company also gives an annual dividend yield of 3.85% to its shareholders with the goal of further improving the yield. Therefore, considering the good growth prospects along with a lower-than-historical P/E ratio, I give this stock a "buy" rating.
For further details see:
Portland General Electric: Promising Opportunities For Growth