Portland General Electric Co. (POR)

Portland General Electric is a power company in the Pacific Northwest. It owns power plants, transmission lines, and distribution networks that deliver electricity to about two million people across Oregon and southwestern Washington. It is a regulated utility, which means a government agency sets what it can charge customers and oversees its operations. Because of this, Portland General Electric earns predictable profits and pays a steady dividend to shareholders.

What a utility company does

Portland General Electric does three things. First, it owns and runs power plants that create electricity. These plants burn coal, natural gas, or harness hydroelectric power to turn turbines. Second, it owns transmission lines that carry electricity from power plants across long distances. Third, it owns distribution lines that deliver that electricity to your house or business. Most people deal only with the third part—the bill they get each month and the lines that arrive at their property—but all three are part of the same company.

The company serves about two million people in its territory, roughly the Portland, Oregon area plus much of the surrounding state. This is a defined geographic area. Portland General Electric is the monopoly electricity provider there. You cannot switch to a competitor the way you switch phone companies. This monopoly power is the key to understanding utilities.

Why utilities are regulated

Because Portland General Electric has a monopoly—you have no choice but to buy electricity from them—the government controls what the company can charge. An agency called the Oregon Public Utility Commission sets “rates” (what Portland General Electric can charge customers per kilowatt-hour). The commission does this to prevent the company from overcharging customers.

The commission also requires Portland General Electric to serve all customers in its territory, even unprofitable ones. In return, Portland General Electric gets a guaranteed return on its investment. If the company invests a billion dollars in new power lines or plants, the commission will allow the company to earn a set percentage return on that money—usually around 8 to 10 percent per year. This rate of return does not depend on how well the company runs or whether it is profitable in the traditional sense. It is a contract with the regulator.

This creates a very different business model than a typical corporation. A software company gets rich by innovating and cutting costs. A utility company gets rich by building more infrastructure and being allowed to earn a fixed return on it.

The power sources

Portland General Electric’s power comes from four main sources. Hydroelectric dams on the Columbia River and other Pacific Northwest rivers provide about half the company’s electricity. Hydro power is renewable, produces no greenhouse gas, and has low operating costs once a dam is built. However, hydro output depends on rainfall and snowmelt, which varies year to year.

Natural gas plants provide the next-largest share, around a quarter of generation. These plants are flexible—they can ramp up or down quickly—which is useful for matching electricity supply to demand throughout the day. Natural gas is cheaper than coal but produces some greenhouse gas.

Coal plants once provided most of the company’s electricity, but Portland General Electric has been retiring coal plants as they age and as environmental regulations have made coal more expensive to burn. Coal is cheap fuel but produces a lot of carbon dioxide and other pollution.

Wind and solar are the fastest-growing sources. Portland General Electric has invested in wind farms across Oregon and is building more solar capacity. These sources produce no greenhouse gas but are intermittent (the wind does not always blow, the sun does not always shine), which creates challenges for the company in balancing supply and demand.

Money in and money out

Portland General Electric’s revenue comes almost entirely from selling electricity to customers. Residential customers pay a monthly bill based on how much electricity they use. Commercial and industrial customers pay similar rates, often negotiated based on volume. Because electricity is essential—people must have it—demand is relatively stable month to month and year to year. This makes Portland General Electric’s revenue predictable.

The company’s costs are fuel (coal, natural gas), maintenance of power plants and lines, wages for employees, and the cost of money (interest on debt used to finance infrastructure). Because rates are regulated, Portland General Electric cannot simply raise prices when costs go up. It must file for a rate increase with the Public Utility Commission and prove that higher rates are justified. This can take months or years, which means the company sometimes operates with margin pressure until rates catch up to costs.

The dividend and shareholder returns

Portland General Electric pays a dividend every quarter—cash returned to shareholders. The dividend is the main reason many people own utility stocks. The company is not trying to grow quickly or dramatically increase share price. It is trying to generate steady cash flow that it can return to shareholders while investing enough in infrastructure to maintain its service and comply with regulations.

The dividend is paid from cash generated by operations after the company pays for maintenance, upgrades to the power grid, and debt service (interest payments on money borrowed). During years when costs rise faster than rates, the dividend may be flat. During years when rates rise faster than costs, the dividend can grow modestly. Over decades, investors own the stock primarily for this dividend income, not for capital appreciation.

Challenges ahead

Portland General Electric faces several headwinds. The first is the shift toward renewable energy. Laws in Oregon and Washington require the company to get more and more electricity from wind and solar. These sources are cheaper to run (no fuel cost) but are expensive to install and raise questions about reliability in winter and cloudy seasons. The company is investing heavily in battery storage and upgrading its grid to handle variable renewable output.

The second is electrification. As cars shift from gasoline to electric, and as heat pumps replace fossil-fuel heating, electricity demand will grow. This is good for Portland General Electric’s growth prospects but requires massive investment in generating capacity and transmission lines. Where does the money for this investment come from? The company must borrow and raise capital, or earn higher returns on existing assets (which requires seeking higher rates from regulators).

The third is political pressure on rates. Regulators sometimes side with customer groups arguing that utility rates are too high, especially for low-income customers. This can slow or limit rate increases the company seeks.

How to research Portland General Electric as an investment

Portland General Electric’s annual 10-K filing (SEC CIK 0000784977) describes the service territory, the generation mix, regulations affecting the business, and the capital plan for the next several years. The company’s quarterly earnings reports show revenue per customer and whether the company is earning the allowed return on equity set by regulators.

Key numbers to watch are return on equity (is the company earning what regulators allow?), dividend per share (is it growing?), and the capital spending plan (is the company investing enough to meet long-term demand?). Read the risk section of the 10-K carefully to understand how regulatory changes could affect the business.

Utility stocks are typically owned by conservative investors seeking income, not capital gain. The share price does not change as much as a typical stock because the dividend is predictable and the business is stable. You buy Portland General Electric stock for the quarterly check, not for the hope of a stock price doubling.