<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of report (date of earliest event reported):
March 3, 1998
PACIFICORP
(Exact name of registrant as specified in its charter)
State of Oregon 1-5152 93-0246090
(State of Incorporation) (Commission (I.R.S. Employer
File No.) Identification No.)
700 N.E. Multnomah, Suite 1600, Portland, Oregon 97232-4116
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(503) 731-2000
No Change
(Former Name or Former Address, if changed since last report)
<PAGE>
Item 5. OTHER EVENTS
Information contained in news releases of PacifiCorp (the "Company")
issued March 3, 1998 concerning the following matters are incorporated herein by
reference: (a) the proposed cash offer by a subsidiary of the Company of 820
pence per share for all outstanding shares of The Energy Group ("TEG") and (b)
an increased offer of 840 pence per share for all outstanding shares of TEG by
Texas Utilities Company. Also filed as an exhibit hereto are the audited, 1997
consolidated financial statements and related footnotes of PacifiCorp and its
subsidiaries.
Item 7. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS
(c) Exhibits.
23 Independent Auditors' Consent.
99(a) PacifiCorp news release issued March 3, 1998.
99(b) PacifiCorp news release issued March 3, 1998.
99(c) The audited, 1997 consolidated financial statements of
PacifiCorp and its subsidiaries.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFICORP
(Registrant)
By: /s/ Richard T. O'Brien
Richard T. O'Brien
Senior Vice President and
Chief Financial Officer
Date: March 18, 1998
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
PacifiCorp:
We consent to the incorporation by reference in Registration Statement Nos.
33-51277, 33-54169, 33-57043, 33-58461, 333-10885, and 333-45851, all on Form
S-8, Registration Statement Nos. 33-62095 and 333-09115 on Form S-3, and
Registration Statement No. 33-36239 on Form S-4, of our report dated February
3, 1998 (March 2, 1998 as to Note 2), included in this Form 8-K of PacifiCorp
and subsidiaries for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Portland, Oregon
March 18, 1998
<PAGE>
Scott Hibbs, for investors, (503) 731-2123
Angela Hult, for investors, (503) 731-2192
Dave Kvamme, for media (503) 464-6272
March 3, 1998
PACIFICORP OFFERS 820 PENCE PER SHARE FOR THE ENERGY GROUP
PORTLAND, Oregon - PacifiCorp (NYSE: PPW) Monday offered 820 pence for The
Energy Group PLC (NYSE/LSE: TEG) and noted today the increased bid of 840 pence
by Texas Utilities Company (NYSE: TXU).
PacifiCorp has obtained all regulatory approvals it was seeking and which
were conditions to its offer. "Texas Utilities, on the other hand, still must
obtain regulatory clearances, which can take several months," PacifiCorp said.
The company noted that it obtained clearance from the U.S. Federal Trade
Commission in mid-February, eight months after making its initial offer and from
the UK government in mid-December following a six-month investigation.
PacifiCorp also announced that its wholly owned subsidiary, PacifiCorp
Acquisitions, has acquired 45,987,079 Energy Group shares at a price of 820
pence per share. As a result, PacifiCorp now owns 8.8 percent of the
outstanding shares of TEG.
The increased PacifiCorp offer values the fully diluted share capital of
The Energy Group at approximately $7.172 billion (4.347 billion pounds).
PacifiCorp's bid of 820 pence is 7 per cent higher than its renewed offer of 765
pence, which was sent to TEG shareholders February 6.
"The PacifiCorp offer provides TEG shareholders excellent value and
certainty," the company said.
The acquisition is expected to be accretive to PacifiCorp's earnings in the
first year following completion of the transaction and thereafter. This
statement should not be interpreted to mean that PacifiCorp's total reported
earnings per share will necessarily be greater than those for the year ended
December 31, 1997, the company said.
<PAGE>
In making the increased offer for TEG, PacifiCorp reiterated the company's
commitment to credit quality and its aggressive consolidated debt reduction
program following the acquisition, including consideration of the disposition of
any non-strategic assets.
"The acquisition financing package continues to be consistent with the high
quality nature of the assets being acquired," the company said.
PacifiCorp, one of the lowest-cost electricity producers in the United
States, is a multinational energy company with 1.4 million retail electric
customers in the western United States and 550,000 customers in the State of
Victoria, Australia. PacifiCorp, which has more than 10,000 megawatts of
generation capacity, also is the largest investor-owned bulk power marketer in
the western U.S. and is an active electricity and gas marketer in the eastern
U.S.
The Energy Group owns Eastern Electricity, the largest regional electricity
company in the UK with more than 3 million customers, and Peabody, the world's
largest privately owned coal company, based in the U.S.
Upon completion of the transaction, the combined company will have 5
million customers, 17,000 megawatts of generation and more than 10 billion tons
of coal reserves in the United States, the United Kingdom and Australia.
###
<PAGE>
Scott Hibbs, for investors, (503) 731-2123
Angela Hult, for investors (503) 731-2192
Dave Kvamme, for media (503) 464-6272
March 3, 1998
PACIFICORP NOTES TEXAS UTILITIES' INCREASED OFFER
PORTLAND, Oregon - PacifiCorp (NYSE: PPW) notes Texas Utilities Company's
(NYSE: TXU) increased offer of 840 pence per Energy Group share.
Texas Utilities' offer is conditional upon, among other conditions,
clearance by the UK Secretary of State for Trade and Industry and the U.S.
Federal Trade Commission.
PacifiCorp has acquired 45,987,079 Energy Group Shares at 820 pence per
share, representing approximately 8.8 percent of the outstanding share capital
of The Energy Group PLC.
A further announcement containing details of PacifiCorp's increased offer
will be made in due course.
###
<PAGE>
REPORT OF MANAGEMENT
The management of PacifiCorp is responsible for preparing the accompanying
consolidated financial statements and for their integrity and objectivity. The
statements were prepared in accordance with generally accepted accounting
principles. The financial statements include amounts that are based on
management's best estimates and judgments. Management also prepared the other
information in the annual report and is responsible for its accuracy and
consistency with the financial statements.
The Company's financial statements were audited by Deloitte & Touche LLP
("Deloitte & Touche"), independent public accountants. Management made available
to Deloitte & Touche all the Company's financial records and related data, as
well as the minutes of shareholders' and directors' meetings.
Management of the Company established and maintains an internal control
structure that provides reasonable assurance as to the integrity and
reliability of the financial statements, the protection of assets from
unauthorized use or disposition and the prevention and detection of
materially fraudulent financial reporting. The Company maintains an internal
auditing program that independently assesses the effectiveness of the
internal control structure and recommends possible improvements. Deloitte &
Touche considered that internal control structure in connection with their
audit. Management reviews significant recommendations by the internal
auditors and Deloitte & Touche concerning the Company's internal control
structure and ensures appropriate cost-effective actions are taken.
The Company's "Guide to Business Conduct" is distributed to employees
throughout the Company to provide a basis for ethical standards and conduct. The
guide addresses, among other things, potential conflicts of interests and
compliance with laws, including those relating to financial disclosure and the
confidentiality of proprietary information. In early 1998, the Company formed a
Business Conduct Group in order to dedicate more resources to business conduct
issues, and to provide more consistent and thorough communications and training
in legal compliance and ethical conduct.
The Audit Committee of the Board of Directors is comprised solely of
outside directors. It meets at least quarterly with management, Deloitte &
Touche, internal auditors and counsel to review the work of each and ensure the
Committee's responsibilities are being properly discharged. Deloitte & Touche
and internal auditors have free access to the Committee, without management
present, to discuss, among other things, their audit work and their evaluations
of the adequacy of the internal control structure and the quality of financial
reporting.
/s/ Richard T. O'Brien
RICHARD T. O'BRIEN
Senior Vice President and Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND
BOARD OF DIRECTORS OF PACIFICORP:
We have audited the accompanying consolidated balance sheets of PacifiCorp and
subsidiaries as of December 31, 1997 and 1996, and the related statements of
consolidated income and retained earnings and of consolidated cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of PacifiCorp and subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Portland, Oregon
February 3, 1998 (March 2, 1998 as to Note 2)
PACIFICORP P.41
<PAGE>
STATEMENTS OF CONSOLIDATED INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS/FOR THE YEAR 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $6,278.0 $ 3,803.7 $ 2,806.8
--------------------------------------------
EXPENSES
Operations and maintenance 4,394.0 1,949.3 1,291.6
Administrative and general 334.4 244.8 186.6
Depreciation and amortization 476.9 423.8 333.7
Taxes, other than income taxes 99.8 99.4 104.3
Special charges 170.4 -- --
--------------------------------------------
Total 5,475.5 2,717.3 1,916.2
--------------------------------------------
INCOME FROM OPERATIONS 802.5 1,086.4 890.6
--------------------------------------------
INTEREST EXPENSE AND OTHER
Interest expense 439.5 415.0 336.4
Interest capitalized (12.5) (11.4) (14.9)
Minority interest and other 40.6 16.2 (24.7)
--------------------------------------------
Total 467.6 419.8 296.8
--------------------------------------------
Income from continuing operations
before income taxes 334.9 666.6 593.8
Income tax expense 109.5 236.4 191.8
--------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEM 225.4 430.2 402.0
DISCONTINUED OPERATIONS (less applicable
income tax expense: 1997/$363.4,
1996/$47.5 and 1995/$47.0) 454.3 74.7 103.0
EXTRAORDINARY LOSS FROM REGULATORY
ASSET IMPAIRMENT (less applicable
income tax expense of $9.6) (16.0) -- --
--------------------------------------------
NET INCOME 663.7 504.9 505.0
RETAINED EARNINGS, JANUARY 1 782.8 632.4 474.3
Cash dividends declared
Preferred stock (20.0) (29.1) (38.4)
Common stock per share of $1.08 (320.0) (317.9) (306.6)
Preferred stock retired (0.2) (7.5) (1.9)
--------------------------------------------
RETAINED EARNINGS, DECEMBER 31 $1,106.3 $ 782.8 $ 632.4
--------------------------------------------
--------------------------------------------
EARNINGS ON COMMON STOCK $ 640.9 $ 475.1 $ 466.3
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING -- BASIC (Thousands) 296,094 292,424 284,272
EARNINGS PER COMMON SHARE
-- BASIC AND DILUTIVE
Continuing operations $ 0.68 $ 1.37 $ 1.28
Discontinued operations 1.53 0.25 0.36
Extraordinary item (0.05) -- --
--------------------------------------------
Total $ 2.16 $ 1.62 $ 1.64
--------------------------------------------
--------------------------------------------
</TABLE>
(See accompanying Notes to Consolidated Financial Statements)
P.42 PACIFICORP
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS/FOR THE YEAR 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 663.7 $ 504.9 $ 505.0
Adjustments to reconcile net income
to net cash provided by continuing
operations
Income from discontinued operations (89.2) (74.7) (103.0)
Gain on disposal of discontinued operations (365.1) -- --
Extraordinary loss from regulatory
asset impairment 16.0 -- --
Depreciation and amortization 492.2 440.5 372.2
Deferred income taxes and investment
tax credits -- net (81.6) 26.1 38.0
Special charges 170.4 -- --
Gain on sale of subsidiary (56.5) -- --
Other 19.0 (27.1) 12.0
Accounts receivable and prepayments (281.6) (158.5) (36.0)
Materials, supplies, fuel stock and inventory (3.4) 26.8 (11.2)
Accounts payable and accrued liabilities 340.1 148.1 (7.6)
--------------------------------------------
Net cash provided by continuing operations 824.0 886.1 769.4
Net cash provided by (used in)
discontinued operations 10.1 39.6 (94.1)
--------------------------------------------
Net Cash Provided by Operating Activities 834.1 925.7 675.3
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction (581.7) (528.4) (456.8)
Operating companies and assets acquired (135.0) (199.4) (1,633.7)
Investments in and advances to
affiliated companies -- net (72.3) (148.4) 0.3
Proceeds from sales of assets 1,666.3 49.3 137.9
Proceeds from sales of finance assets and
principal payments 103.2 55.8 36.6
Other (58.5) (10.5) (27.4)
--------------------------------------------
Net Cash Provided by (Used in) Investing Activities 922.0 (781.6) (1,943.1)
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Changes in short-term debt (494.4) (247.6) 499.6
Proceeds from long-term debt 726.4 567.6 1,376.9
Proceeds from issuance of common stock 37.2 221.3 0.4
Proceeds from issuance of preferred securities
of Trust holding solely PacifiCorp debentures 130.6 209.6 --
Dividends paid (341.2) (346.4) (346.5)
Repayments of long-term debt (919.8) (284.5) (204.4)
Redemptions of capital stock (72.2) (221.6) (2.6)
Other (89.8) (49.9) (53.2)
--------------------------------------------
Net Cash Provided by (Used in) Financing Activities (1,023.2) (151.5) 1,270.2
--------------------------------------------
Increase/(Decrease) in Cash and Cash Equivalents 732.9 (7.4) 2.4
Cash and Cash Equivalents at Beginning of Year 8.4 15.8 13.4
--------------------------------------------
Cash and Cash Equivalents at End of Year $ 741.3 $ 8.4 $ 15.8
--------------------------------------------
--------------------------------------------
</TABLE>
(See accompanying Notes to Consolidated Financial Statements)
PACIFICORP P.43
<PAGE>
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS/DECEMBER 31 1997 1996
- --------------------------------------------------------------------------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 741.3 $ 8.4
Accounts receivable less allowance for doubtful
accounts: 1997/$18.8 and 1996/$8.5 919.5 620.9
Materials, supplies and fuel stock at average cost 194.3 181.3
Net assets of discontinued operations -- 779.5
Real estate investments held for sale 272.2 --
Other 55.0 71.8
------------------------
Total Current Assets 2,182.3 1,661.9
PROPERTY, PLANT AND EQUIPMENT
Domestic Electric Operations
Production 4,720.6 4,659.2
Transmission 2,087.8 2,069.2
Distribution 3,244.0 3,029.7
Other 1,784.8 1,687.9
Construction work in progress 257.4 252.8
------------------------
Total Domestic Electric Operations 12,094.6 11,698.8
Australian Electric Operations 1,161.2 1,361.9
Other Operations 56.9 68.8
Accumulated depreciation and amortization (4,242.4) (3,862.4)
------------------------
Total Property, Plant and Equipment -- Net 9,070.3 9,267.1
OTHER ASSETS
Investments in and advances to affiliated companies 281.6 253.9
Intangible assets -- net 524.9 480.7
Regulatory assets -- net 871.1 1,022.8
Finance note receivable 211.2 214.6
Finance assets -- net 349.8 425.6
Real estate investments -- 217.0
Deferred charges and other 389.0 268.7
------------------------
Total Other Assets 2,627.6 2,883.3
------------------------
TOTAL ASSETS $13,880.2 $13,812.3
-------------------------
-------------------------
</TABLE>
(See accompanying Notes to Consolidated Financial Statements)
P.44 PACIFICORP
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS/DECEMBER 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Long-term debt currently maturing $ 365.5 $ 219.8
Notes payable and commercial paper 189.2 683.5
Accounts payable 630.7 477.5
Taxes, interest and dividends payable 701.2 290.8
Customer deposits and other 218.9 83.7
-------------------------
Total Current Liabilities 2,105.5 1,755.3
DEFERRED CREDITS
Income taxes 1,676.1 1,801.0
Investment tax credits 135.2 143.2
Other 646.2 727.9
-------------------------
Total Deferred Credits 2,457.5 2,672.1
LONG-TERM DEBT 4,414.5 4,829.4
COMMITMENTS AND CONTINGENCIES
(See Note 12) -- --
GUARANTEED PREFERRED BENEFICIAL
INTERESTS IN COMPANY'S JUNIOR
SUBORDINATED DEBENTURES 340.4 209.7
PREFERRED STOCK SUBJECT TO
MANDATORY REDEMPTION 175.0 178.0
PREFERRED STOCK 66.4 135.5
COMMON EQUITY
Common shareholders' capital
shares authorized 750,000,000;
shares outstanding: 1997/296,908,110
and 1996/295,139,753 3,274.2 3,236.8
Retained earnings 1,106.3 782.8
Cumulative currency translation adjustment (59.6) 12.7
-------------------------
Total Common Equity 4,320.9 4,032.3
-------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $13,880.2 $13,812.3
-------------------------
-------------------------
</TABLE>
(See accompanying Notes to Consolidated Financial Statements)
PACIFICORP P.45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of PacifiCorp (the "Company") include its
integrated domestic electric utility operating divisions of Pacific Power and
Utah Power and its wholly owned and majority owned subsidiaries. Major
subsidiaries, all of which are wholly owned, are: PacifiCorp Group Holdings
Company, formerly PacifiCorp Holdings, Inc. ("Holdings"), which holds all of the
Company's nonintegrated electric utility investments, including Powercor
Australia Limited ("Powercor"), an Australian electricity distributor purchased
December 12, 1995; PacifiCorp Financial Services, Inc. ("PFS"), a financial
services business; PacifiCorp Power Marketing ("PPM"), engaged in wholesale
electricity trading in the eastern United States energy markets; and TPC
Corporation ("TPC"), a natural gas marketing and storage company, purchased
April 15, 1997. Together these businesses are referred to herein as the
Companies. Significant intercompany transactions and balances have been
eliminated.
Investments in and advances to affiliated companies represent investments
in unconsolidated affiliated companies carried on the equity basis, which
approximate the Company's equity in their underlying net book value.
The Company sold its wholly owned telecommunications subsidiary, Pacific
Telecom, Inc. ("PTI"), on December 1, 1997. See Note 3. The Company sold Pacific
Generation Company ("PGC") on November 5, 1997, and the natural gas gathering
and processing assets of TPC on December 1, 1997. In addition, the Company has
signed letters of intent to sell the real estate assets held by PFS. See Note
15.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
REGULATION
Accounting for the majority of the domestic electric utility business conforms
with generally accepted accounting principles as applied to regulated public
utilities and as prescribed by agencies and the commissions of the various
locations in which the electric utility business operates. The Company prepares
its financial statements as they relate to Domestic Electric Operations in
accordance with Statement of Financial Accounting Standards ("SFAS") 71,
"Accounting for the Effects of Certain Types of Regulation." See Note 4.
ASSET IMPAIRMENTS
Long-lived assets and certain identifiable intangibles to be held and used by
the Company are reviewed for impairment when events or circumstances indicate
costs may not be recoverable. Impairment losses on long-lived assets are
recognized when book values exceed expected undiscounted future cash flows. If
impairment exists, the asset's book value will be written down to its fair
value.
CASH AND CASH EQUIVALENTS
For the purposes of these financial statements, the Company considers all liquid
investments with original maturities of three months or less to be cash
equivalents.
FOREIGN CURRENCY TRANSLATION
Financial statements for foreign subsidiaries are translated into United States
dollars at end of period exchange rates as to assets and liabilities and
weighted average exchange rates as to revenues and expenses. The resulting
exchange gains or losses are accumulated in the "cumulative currency translation
adjustment" account, a component of common equity. All gains and losses
resulting from foreign currency transactions are included in the determination
of income.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at original cost of contracted
services, direct labor and materials, interest capitalized during construction
and indirect charges for engineering, supervision and similar overhead items.
The cost of depreciable domestic electric utility properties retired, including
the cost of removal, less salvage, is charged to accumulated depreciation.
DEPRECIATION AND AMORTIZATION
At December 31, 1997, the average depreciable lives of property, plant and
equipment by category were: Domestic Electric Operations -- Production, 35
years; Transmission, 42 years; Distribution, 31 years; Other, 16 years; and
Australian Electric Operations, 20 years.
Depreciation and amortization is generally computed by the straight-line
method in the following manner: As prescribed by the Company's various
regulatory jurisdictions for Domestic Electric Operations' regulated assets; and
over the estimated useful lives of the related assets for Domestic Electric
Operations' nonregulated generation resource assets and for other nonregulated
assets. Provisions for depreciation (excluding amortization of capital leases)
in the domestic electric and Australian electric businesses were 3.4%, 3.2%
and 3.0% of average depreciable assets in 1997, 1996 and 1995, respectively.
P.46 PACIFICORP
<PAGE>
MINE RECLAMATION AND CLOSURE COSTS
The Company expenses current mine reclamation costs and accrues for estimated
final mine reclamation and closure costs using the units-of-production method.
INVENTORY VALUATION
Inventories are generally valued at the lower of average cost
or market.
INTANGIBLE ASSETS
Intangible assets consist of: license and other intangible costs relating to
Australian Electric Operations ($393 million and $26 million, respectively, in
1997 and $460 million and $32 million, respectively, in 1996) and excess cost
over net assets of businesses acquired ($129 million in 1997). These costs are
offset by accumulated amortization ($23 million in 1997 and $11 million in
1996). Licenses and other intangible costs are generally being amortized over 40
years and excess cost over net assets of businesses acquired is being amortized
over 30 years. Had Australian Electric Operations' 1996 intangible asset amounts
been converted to United States dollars at 1997 rates, 1996 intangible
assets-net would have been $73 million lower than reported.
FINANCE ASSETS
Finance assets consist of finance receivables, leveraged leases and operating
leases and are not significant to the Company in terms of revenue, net income or
assets. The Company's leasing operations consist principally of leveraged
aircraft leases. Investments in finance assets are net of allowances for credit
losses and accumulated impairment charges of $47 million and $63 million at
December 31, 1997 and 1996, respectively.
DERIVATIVES
Gains and losses on hedges of existing assets and liabilities are included in
the carrying amounts of those assets or liabilities and are recognized in income
as part of the carrying amounts. Gains and losses related to hedges of
anticipated transactions and firm commitments are deferred on the balance sheet
and recognized in income when the transaction occurs. Nonhedged derivative
instruments are marked-to-market with gains or losses recognized in the
determination of net income.
INTEREST CAPITALIZED
Costs of debt and equity applicable to domestic electric utility properties are
capitalized during construction. The composite capitalization rates were 5.7%
for 1997, 5.6% for 1996 and 6.2% for 1995.
INCOME TAXES
The Company uses the liability method of accounting for deferred income taxes.
Deferred tax liabilities and assets reflect the expected future tax
consequences, based on enacted tax law, of temporary differences between the tax
bases of assets and liabilities and their financial reporting amounts.
Prior to 1980, Domestic Electric Operations did not provide deferred taxes
on many of the timing differences between book and tax depreciation. In prior
years, these benefits were flowed through to the utility customer as prescribed
by the Company's various regulatory jurisdictions. Deferred income tax
liabilities and regulatory assets have been established for those flow through
tax benefits. See Note 4.
Investment tax credits for regulated Domestic Electric Operations are
deferred and amortized to income over periods prescribed by the Company's
various regulatory jurisdictions.
Provisions for United States income taxes are made on the undistributed
earnings of the Company's international businesses.
REVENUE RECOGNITION
The Company accrues estimated unbilled revenues for electric services provided
after cycle billing to month-end.
UNREGULATED ENERGY TRADING ACTIVITIES
Revenues and purchased energy expense for the Company's unregulated energy
trading businesses are recorded upon delivery or settlement of natural gas and
electricity.
PREFERRED STOCK RETIRED
Amounts paid in excess of the net carrying value of preferred stock retired are
amortized in accordance with regulatory orders.
STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of employee stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is recorded.
EARNINGS PER SHARE
The Company computes Earnings per Share ("EPS") based on SFAS 128, "Earnings per
Share," which was issued during 1997. Basic EPS is computed by dividing earnings
on common stock by the weighted average number of common shares outstanding.
Diluted EPS for the Company is computed by dividing earnings on common stock by
the weighted average number of common shares outstanding, including shares that
would be outstanding assuming the exercise of granted stock options. The
Company's basic and diluted EPS are the same for all periods presented herein.
RECLASSIFICATION
Certain amounts from prior years have been reclassified to conform with the 1997
method of presentation. These reclassifications had no effect on previously
reported consolidated net income.
PACIFICORP P.47
<PAGE>
NOTE 2
PROPOSED ACQUISITION
On June 13, 1997, PacifiCorp announced a cash tender offer for The Energy Group
PLC ("TEG"). TEG is a diversified international energy group with operations in
the United Kingdom (the "UK"), the United States and Australia and includes
Eastern Group PLC, one of the leading integrated electricity and gas groups in
the UK and Peabody Holding Company, Inc., the world's largest private producer
of coal. The Company's initial offer lapsed on August 1, 1997 when it was
referred to the Monopolies and Mergers Commission (the "MMC") by the President
of the Board of Trade in the UK. The proposed acquisition of TEG by PacifiCorp
was subsequently cleared by the President of the Board of Trade on December 19,
1997.
On February 3, 1998, PacifiCorp announced the terms of a renewed cash
tender offer for TEG of 765 pence for each ordinary share. On March 2, 1998,
Texas Utilities Company ("TU") announced an offer of 810 pence for each TEG
share. Following TU's announcement, PacifiCorp announced an increased cash offer
of 820 pence for each TEG share. This increased offer values the transaction at
$11.1 billion, including the purchase of 521 million shares and the assumption
of $4.1 billion of TEG's debt. The acquisition was to be financed with cash
raised through sales of noncore assets of subsidiaries of Holdings (see Notes 3
and 15) and borrowings by subsidiaries of Holdings. PacifiCorp's announcement of
the increased offer followed the acquisition on March 2, 1998 by a subsidiary of
Holdings of approximately 46 million TEG shares at a price of 820 pence per
share. These shares represent approximately 8.8% of the outstanding share
capital of TEG.
On March 3, 1998, TU announced that it was increasing its offer to 840
pence for each TEG share. TU's offer is subject to clearance by the UK Secretary
of State for Trade and Industry and certain other regulatory bodies. TU has also
announced that it has acquired approximately 15% of the outstanding share
capital of TEG.
Upon initiation of the original tender offer in June 1997, the Company also
entered into foreign currency exchange contracts. The financing facilities
associated with the June 1997 offer for TEG terminated upon referral to the MMC
and the Company initiated steps to unwind its foreign currency exchange
positions consistent with its policies on derivatives. As a result of the
termination of these positions and initial option costs, the Company realized an
after-tax loss of approximately $65 million, or $0.22 per share, in the third
quarter of 1997.
Additionally, the Company estimates that as of December 31, 1997, it had
incurred approximately $68 million of other pre-tax costs relating to the TEG
transaction for bank commitment and facility fees, legal expenses and other
related costs. There is risk that a transaction with TEG will not occur. If it
becomes likely that the transaction will not occur or significant uncertainty
arises, the Company will write off these transaction costs as a charge to
income.
NOTE 3
DISCONTINUED OPERATIONS
On December 1, 1997, Holdings completed the sale of PTI to Century Telephone
Enterprises, Inc. ("Century"). Pursuant to a stock purchase agreement dated June
11, 1997, Century acquired all the stock of PTI for $1.5 billion in cash plus
the assumption of PTI's debt of $713 million. The sale resulted in a gain of
$365 million net of income taxes of $306 million, or $1.23 per share. A portion
of the proceeds from the sale of PTI were used to repay short-term debt of
Holdings. The remaining proceeds were invested in short-term money market
instruments and Holdings temporarily advanced excess funds to Domestic Electric
Operations for retirement of short-term debt.
Summarized operating results for PTI, excluding gain on sale, were as
follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS FOR THE YEARS
ENDED NOVEMBER 30 ENDED DECEMBER 31
MILLIONS OF DOLLARS 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $522.4 $521.1 $640.1
-------------------------------------
Income before income taxes $146.8 $122.2 $150.0
Income taxes 57.6 47.5 47.0
-------------------------------------
Net income(a) $89.2 $74.7 $103.0
-------------------------------------
-------------------------------------
Earnings per share(a) $0.30 $0.25 $0.36
-------------------------------------
-------------------------------------
</TABLE>
(a) Results in 1995 included $37 million, or $0.13 per share, relating to the
sale of PTI's long-distance telecommunications Subsidiary.
Net assets of the discontinued operations of PTI consisted of the
following:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS/DECEMBER 31 1996
- --------------------------------------------------------------------------------
<S> <C>
Current assets $ 238.5
Noncurrent assets 1,463.4
Notes payable and commercial paper (18.0)
Long-term debt currently maturing (15.8)
Other current liabilities (136.1)
Long-term debt (527.9)
Noncurrent liabilities (207.4)
Minority interest (17.2)
----------
Net Assets of Discontinued Operations $ 779.5
----------
----------
</TABLE>
P.48 PACIFICORP
<PAGE>
NOTE 4
ACCOUNTING FOR THE EFFECTS
OF REGULATION
Regulated utilities have historically applied the provisions of SFAS 71 which
is based on the premise that regulators will set rates that allow for the
recovery of a utility's costs, including cost of capital. Accounting under
SFAS 71 is appropriate as long as: rates are established by or subject to
approval by independent, third-party regulators; rates are designed to
recover the specific enterprise's cost-of-service; and in view of demand for
service, it is reasonable to assume that rates are set at levels that will
recover costs and can be collected from customers. In applying SFAS 71, the
Company must give consideration to changes in the level of demand or
competition during the cost recovery period. In accordance with SFAS 71,
Domestic Electric Operations capitalizes certain costs, regulatory assets, in
accordance with regulatory authority whereby those costs will be expensed and
recovered in future periods.
The Emerging Issues Task Force of the Financial Accounting Standards Board
(the "EITF") concluded in 1997 that SFAS 71 should be discontinued when detailed
legislation or regulatory order regarding competition is issued. Additionally,
the EITF concluded that regulatory assets and liabilities applicable to
businesses being deregulated should be written off unless their recovery is
provided for through future regulated cash flows.
In 1996, legislation was passed in California restructuring its electric
utility industry. The restructuring is scheduled to begin on March 31, 1998, at
which time customers will be able to buy their electricity from sources other
than the local utility. The local utility will continue to provide distribution
services. Legislation was also passed in Montana in 1997 which established a
phased process to introduce price-based competition into the supply of
electricity in Montana. As a result of these legislative actions, prices for the
supply of electric generation in California and Montana are, or are expected to
be, in transition from cost-based regulated rates to rates determined by
competitive market forces.
Regulatory assets--net included the following:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS/DECEMBER 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred taxes -- net(a) $ 650.1 $ 676.0
Deferred pension costs -- 102.9
Demand-side resource costs 108.3 118.8
Unamortized net loss on reacquired debt 60.6 68.4
Unrecovered Trojan Plant and regulatory
study costs 23.0 26.8
Various other costs 29.1 29.9
-------------------------
Total $ 871.1 $ 1,022.8
-------------------------
-------------------------
</TABLE>
(a) Excludes $135 million of investment tax credit regulatory liabilities.
The Company has evaluated its regulatory assets and liabilities related to
the generation portion of its business allocable to the states of California and
Montana based upon future regulated cash flows. Accordingly, the Company ceased
the application of SFAS 71 to its generation business allocable to the states of
California and Montana in 1997. Domestic Electric Operations recorded an
extraordinary loss of $16 million, or $0.05 per share, for the write off of
these regulatory assets and liabilities.
The Company operates in five other states (Oregon, Utah, Wyoming,
Washington and Idaho) which are at various stages of addressing the issue of
deregulating the electricity industry. At December 31, 1997, $382 million of
the $871 million total regulatory assets--net was applicable to the
generation assets allocable to these five states. Because of the potential
regulatory and/or legislative actions in these other state jurisdictions, the
Company may have additional regulatory asset write offs and charges for
impairment of long-lived assets in future periods relating to the generation
portion of its business.
Also in 1997, the Company evaluated all its regulatory assets and
liabilities applicable to deferred pension costs which relate primarily to a
deferred compensation plan and early retirement incentive programs in 1987 and
1990 and determined that recovery of these costs was not probable. As a result,
the Company recorded an $87 million write off of its deferred regulatory pension
asset, since the Company does not intend to seek recovery of these costs.
However, the Company will seek recovery for its current and future pension
costs.
In early 1997, the Division of Public Utilities (the "DPU") and the
Committee of Consumer Services (the "CCS") in Utah filed a joint petition with
the Utah Public Service Commission (the "PSC") requesting the PSC to commence
proceedings to establish new rates for Utah customers. The DPU indicated that
rates could be reduced by approximately $54 million. Subsequently in March 1997,
the Utah Legislature passed a bill that created a legislative task force to
study electrical restructuring and customer choice issues in the State of Utah.
The bill precluded the PSC from holding hearings on rate changes and froze
prices at January 31, 1997 levels until May 1998, but allowed for retroactive
price changes. The Company agreed to an interim price decrease to Utah customers
of $12.4 million annually beginning on April 15, 1997.
During the freeze period, the PSC proceeded with hearings on the proper
method for cost allocation among PacifiCorp's seven jurisdictions that would be
used in the 1998 rate case. The DPU recommended an allocation method that would
reduce prices by $56 million over five years, of which $14 million was included
in its original estimate of $54 million. During these hearings, the CCS
recommended a method that would reduce prices by $96 million, or $42 million
more than the original DPU estimate. The Company advocated a method that would
result in a decrease of approximately $3 million per year. The PSC held hearings
in December and an order is expected in early 1998. An allocation order by
itself will not decrease revenues, but will be incorporated into subsequent rate
proceedings which are expected to occur in mid-1998 and will be combined with
other cost increases and decreases to determine the overall impact to customer
rates.
PACIFICORP P.49
<PAGE>
NOTE 5
SPECIAL CHARGES
In December 1997, Domestic Electric Operations recorded in operating income
special charges of $170 million ($106 million after-tax, or $0.36 per share).
The pretax special charges included write off of $87 million of deferred
regulatory pension assets (see Note 4), a $19 million write off of certain
information system assets associated with the Company's decision to proceed with
an installation of SAP enterprise-wide software and $64 million of costs
associated with the write down of assets and acceleration of reclamation costs
due to the early closure of the Glenrock coal mine. The inability of the mine to
remain competitive has caused it to be uneconomic under current and expected
market conditions due to increased mining stripping ratios, coal quality and
related costs.
Also, in January 1998, the Company announced a plan to reduce its work
force in the United States by approximately 600 positions, or 7% of the work
force in the United States, in 1998. This reduction will be accomplished through
a combination of voluntary early retirement and special severance. Employees are
not required to finalize their acceptance of offers until March 31, 1998. Based
upon the current acceptance rate, the pretax costs are estimated to be $104
million, which will be recorded in the first quarter of 1998. The current
acceptance rate has exceeded the Company's original estimate.
NOTE 6
SHORT-TERM DEBT AND BORROWING ARRANGEMENTS
The Companies' short-term debt and borrowing arrangements were as follows:
<TABLE>
<CAPTION>
AVERAGE
INTEREST
MILLIONS OF DOLLARS/DECEMBER 31 BALANCE RATE(a)
- --------------------------------------------------------------------------------
<S> <C> <C>
1997
PacifiCorp $182.2 6.5%
Subsidiaries 7.0 5.4
1996
PacifiCorp $549.3 5.6%
Subsidiaries 134.2 5.6
</TABLE>
(a) Computed by dividing the total interest on principal amounts outstanding at
the end of the period by the weighted daily principal amounts outstanding.
At December 31, 1997, PacifiCorp's commercial paper and bank line
borrowings were supported by revolving credit agreements totaling $700 million.
At December 31, 1997, subsidiaries had committed bank revolving credit
agreements totaling $1 billion.
The Companies have the intent and ability to support short-term borrowings
through various revolving credit agreements on a long-term basis. At December
31, 1997, PacifiCorp had $121 million and subsidiaries had $757 million of
short-term debt classified as long-term.
P.50 PACIFICORP
<PAGE>
NOTE 7
LONG-TERM DEBT
The Company's long-term debt was as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS/DECEMBER 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
PACIFICORP
First mortgage and collateral trust bonds
Maturing 1998 through 2002/5.9%-9.5% $ 882.2 $1,074.5
Maturing 2003 through 2007/6.1%-9% 756.1 587.2
Maturing 2008 through 2012/7%-9.2% 267.6 144.9
Maturing 2013 through 2017/7.3%-8.8% 164.9 167.6
Maturing 2018 through 2022/8.1%-8.5% 175.0 175.0
Maturing 2023 through 2026/6.7%-8.6% 286.5 286.5
Guaranty of pollution control revenue bonds
5.6%-5.7% due 2021 through 2023(a) 71.2 71.2
Variable rate due 2013 through 2024(a)(b) 216.5 216.5
Variable rate due 2005 through 2030(b) 450.7 450.7
Funds held by trustees (9.1) (12.1)
8.4%-8.6% Junior subordinated debentures
due 2025 through 2035 175.8 175.8
Commercial paper(b)(d) 120.6 123.4
Other 25.1 28.2
------------------------
Total 3,583.1 3,489.4
Less current maturities 194.9 203.8
------------------------
Total 3,388.2 3,285.6
------------------------
SUBSIDIARIES
6.8%-12% Notes due through 2020 266.1 268.8
Australian bank bill borrowings(c)(d) 756.6 922.3
Commercial paper and committed bank lines -- 160.0
Variable rate notes due through 2000(b) 12.1 35.8
4.5%-11% Nonrecourse debt due through 2031 160.7 170.8
Other 1.4 2.1
------------------------
Total 1,196.9 1,559.8
Less current maturities 170.6 16.0
------------------------
Total 1,026.3 1,543.8
------------------------
Total $4,414.5 $4,829.4
------------------------
------------------------
</TABLE>
(a) Secured by pledged first mortgage and collateral trust bonds generally at
the same interest rates, maturity dates and redemption provisions as the
secured pollution control revenue bonds.
(b) Interest rates fluctuate based on various rates, primarily on certificate
of deposit rates, interbank borrowing rates, prime rates or other
short-term market rates.
(c) Interest rates fluctuate based on Australian Bank Bill Acceptance Rates. A
revolving loan agreement requires that at least 50% of the borrowings must
be hedged against variations in interest rates. Approximately $494 million
was hedged at December 31, 1997 at an average rate of 7.6% and for an
average life of 2.6 years.
(d) The Companies have the ability to support short-term borrowings and current
debt being refinanced on a long-term basis through revolving lines of
credit and, therefore, based upon management's intent, have classified $878
million of short-term debt as long-term debt. In early 1998, Australian
Electric Operations issued $400 million of 6.15% Notes due 2008. At the
same time, in order to mitigate foreign currency exchange risk, Australian
Electric Operations entered into a series of cross currency swaps in the
same amount and for the same duration as the underlying United States
denominated notes. The funds were used to repay Australian bank bill
borrowings.
PACIFICORP P.51
<PAGE>
Approximately $7 billion of the assets of the Companies secure long-term debt.
First mortgage and collateral trust bonds of the Company may be issued in
amounts limited by Domestic Electric Operations' property, earnings and other
provisions of the mortgage indenture.
The junior subordinated debentures are unsecured obligations of the Company
and are subordinated to the Company's first mortgage and collateral trust bonds,
pollution control revenue bonds, commercial paper, bank debt and any future
senior indebtedness.
Nonrecourse notes are secured by assignment of related real estate assets.
The noteholders have no additional recourse to the Company. These long-term
nonrecourse notes are classified short-term due to a pending sale of the real
estate assets.
The annual maturities of long-term debt and redeemable preferred stock
outstanding are $366 million, $300 million, $181 million, $386 million and $902
million in 1998 through 2002, respectively.
The Company made interest payments, net of capitalized interest, of $416
million, $456 million and $367 million in 1997, 1996 and 1995, respectively.
NOTE 8
GUARANTEED PREFERRED
BENEFICIAL INTERESTS IN
COMPANY'S JUNIOR
SUBORDINATED DEBENTURES
Wholly owned subsidiary trusts of the Company (the "Trusts") have issued, in
public offerings, redeemable preferred securities ("Preferred Securities")
representing preferred undivided beneficial interests in the assets of the
Trusts, with liquidation amounts of $25 per Preferred Security. The sole assets
of the Trusts are Junior Subordinated Deferrable Interest Debentures of the
Company that bear interest at the same rates as the Preferred Securities, and
certain rights under related guarantees by the Company.
Preferred Securities outstanding at December 31 were as follows:
<TABLE>
<CAPTION>
THOUSANDS OF PREFERRED SECURITIES/MILLIONS OF DOLLARS 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
8,680 8.25% Cumulative Quarterly
Income Preferred Securities,
Series A, with Trust assets of
$224 million $ 209.7 $ 209.7
5,400 7.70% Trust Preferred
Securities, Series B, with
Trust assets of $139 million 130.7 --
--------------------------
Total $ 340.4 $ 209.7
--------------------------
--------------------------
</TABLE>
NOTE 9
COMMON AND PREFERRED STOCK
<TABLE>
<CAPTION>
COMMON
SHARES SHARES SHARE-
COMMON PREFERRED HOLDERS'
THOUSANDS OF SHARES/MILLIONS OF DOLLARS STOCK STOCK CAPITAL
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
AT JANUARY 1, 1995 284,251 10,532 $ 3,010.6
Sales through Employees'
Stock Plans 26 -- 0.4
Junior subordinated
debentures exchanged
for preferred stock(a) -- (2,233) 1.9
--------------------------------------
AT DECEMBER 31, 1995 284,277 8,299 3,012.9
Sales to public 8,790 -- 177.8
Sales through Dividend
Reinvestment and
Stock Purchase Plan 2,073 -- 43.2
Redemptions and repurchases -- (2,342) 2.9
--------------------------------------
AT DECEMBER 31, 1996 295,140 5,957 3,236.8
Sales through Dividend
Reinvestment and
Stock Purchase Plan 1,768 -- 37.4
Redemptions and repurchases -- (2,797) --
--------------------------------------
AT DECEMBER 31, 1997 296,908 3,160 $ 3,274.2
--------------------------------------
--------------------------------------
</TABLE>
(a) Noncash financing activities in 1995 included the exchange of 8.55% Series
Junior Subordinated Debentures due 2025 for 2,233,037 shares of $1.98 No
Par Serial Preferred Stock with a value of $56 million.
At December 31, 1997, there were 27,126,352 authorized but unissued shares of
common stock reserved for issuance under the Dividend Reinvestment and Stock
Purchase Plan and the Employee Savings and Stock Ownership Plans and for sales
to the public. Eligible employees under the employee plans may direct their
pretax elective contributions into the purchase of the Company's common stock.
The Company makes matching contributions, equal to a percentage of employee
contributions, which are invested in the Company's common stock. Employee
contributions eligible for matching contributions are limited to 6% of
compensation. In early 1998, the Company registered 11,500,000 shares of its
common stock with the Securities and Exchange Commission for issuance under the
PacifiCorp Stock Incentive Plan.
Generally, preferred stock is redeemable at stipulated prices plus accrued
dividends, subject to certain restrictions. Upon involuntary liquidation, all
preferred stock is entitled to stated value or a specified preference amount per
share plus accrued dividends.
P.52 PACIFICORP
<PAGE>
PREFERRED STOCK OUTSTANDING
<TABLE>
<CAPTION>
THOUSANDS OF SHARES/MILLIONS OF DOLLARS/DECEMBER 31 1997 1996
SERIES SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SUBJECT TO MANDATORY REDEMPTION
No Par Serial Preferred, $100 stated value,
16,000 Shares authorized
$7.12 -- $ -- 30 $ 3.0
7.70 1,000 100.0 1,000 100.0
7.48 750 75.0 750 75.0
----------------------------------------------------
Total 1,750 $175.0 1,780 $178.0
----------------------------------------------------
NOT SUBJECT TO MANDATORY REDEMPTION
No Par Serial Preferred, $25 stated value
$1.16 193 $ 4.8 193 $ 4.8
1.18 420 10.5 420 10.5
1.28 381 9.5 381 9.5
1.98, Series 1992 -- -- 2,767 69.1
Serial Preferred, $100 stated value,
3,500 Shares authorized
4.52% 2 0.2 2 0.2
4.56 85 8.5 85 8.5
4.72 70 7.0 70 7.0
5.00 42 4.2 42 4.2
5.40 66 6.6 66 6.6
6.00 6 0.6 6 0.6
7.00 18 1.8 18 1.8
5% Preferred, $100 stated value,
127 Shares authorized and
outstanding 127 12.7 127 12.7
----------------------------------------------------
Total 1,410 $66.4 4,177 $135.5
----------------------------------------------------
----------------------------------------------------
</TABLE>
Mandatory redemption requirements at stated value plus accrued dividends on No
Par Serial Preferred Stock are as follows: the $7.70 series is redeemable in its
entirety on August 15, 2001; and 37,500 shares of the $7.48 series are
redeemable on each June 15 from 2002 through 2006, with all shares outstanding
on June 15, 2007 redeemable on that date. If the Company is in default in its
obligation to make any future redemptions on the $7.48 series, it may not pay
cash dividends on common stock.
PACIFICORP P.53
<PAGE>
NOTE 10
FINANCIAL INSTRUMENTS AND
RISK MANAGEMENT
The Company seeks to reduce net income and cash flow exposure to changing
interest and currency exchange rates and commodity price risks through the use
of derivative financial instruments. The Company's participation in derivative
transactions involves instruments that have a close correlation with its
portfolio of assets or liabilities, thereby managing its risk. The majority of
derivatives have been designed for hedging purposes and are not held or issued
for speculative purposes.
NOTIONAL AMOUNTS AND CREDIT EXPOSURE OF DERIVATIVES -- The notional amounts of
derivatives summarized below do not represent amounts exchanged and, therefore,
are not a measure of the exposure of the Company through its use of derivatives.
The amounts exchanged are calculated on the basis of the notional amounts and
other terms of the derivatives, which relate to interest rates, exchange rates
or other indexes.
The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments, but it does not
expect any counterparties to fail to meet their obligations given their high
credit rating requirements. The Company's credit policy provides that
counterparties satisfy established credit ratings. The credit exposure of
interest rate, foreign exchange and forward contracts is represented by the fair
value of contracts with a positive fair value at the reporting date.
INTEREST RATE RISK MANAGEMENT -- The Company enters into various types of
interest rate contracts in managing its interest rate risk, as indicated in the
following table:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
MILLIONS OF DOLLARS/DECEMBER 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Interest rate swaps $707.5 $846.4
Interest rate collars purchased 42.3 52.0
Interest rate futures and forwards -- 60.0
</TABLE>
The Company uses interest rate swaps, collars, futures and forwards to
adjust the characteristics of its liability portfolio, allowing the Company to
establish a mix of fixed or variable interest rates on its outstanding debt.
Additionally, under terms of the variable rate Australian bank bill borrowings,
Australian Electric Operations is required to obtain a fixed interest rate, via
financial derivatives, on at least 50% of the principal outstanding. The
futures and forwards, when used, are accounted for as hedges of the Australian
bank bill borrowings. Interest rate collar agreements entitle the Company to
receive from the counterparties the amounts, if any, by which the Australian
bank bill borrowings interest payments exceed 8.75% and the Company would pay
the counterparties if interest payments fall below 6.5%-6.8%.
Under the various swap agreements, the Company agrees with other parties to
exchange, at specified intervals, the difference between fixed-rate and
variable-rate interest amounts calculated by reference to an agreed notional
principal amount. The following table indicates the weighted-average interest
rates of the swaps. Average variable rates are based on rates implied in the
yield curve at December 31; these may change significantly, affecting future
cash flows. Swap contracts are principally between one and fifteen years in
duration.
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
PAY-FIXED SWAPS
Average pay rate 7.7% 7.7%
Average receive rate 6.5 5.6
</TABLE>
FOREIGN EXCHANGE RISK MANAGEMENT -- At December 31, 1997, Holdings held three
combined interest rate and currency swaps that terminate in 2002, with an
aggregate notional amount of $268 million to hedge a portion of the exposure to
fluctuations in the Australian dollar relating to its investment in Powercor.
The interest rate portions of these three swaps were effectively offset in 1997
by the purchase of an overlay swap transaction with approximately the same
terms. The net amounts of these swaps have not had a significant impact on net
income.
At December 31, 1997, Hazelwood Australia, Inc. ("HAI"), a subsidiary of
Holdings, held a foreign currency forward with a notional amount of $146 million
to hedge a portion of its exposure to fluctuations in the Australian dollar
relating to its investment in the Hazelwood power station and adjacent coal
mine. This position was closed in January 1998 and HAI received $24 million in
cash.
COMMODITY RISK MANAGEMENT -- The Company has utilized electricity forward
contracts (referred to as "contracts for differences") to hedge exposure to
electricity price risk on anticipated transactions or firm commitments in its
Australian Electric Operations. Under these forward contracts, the Company
receives or makes payment based on a differential between a contracted price and
the actual spot market of electricity. Additionally, electricity futures
contracts are utilized to hedge Domestic Electric Operations' excess or shortage
of net electricity for future months.
At December 31, 1997, Australian Electric Operations had 211 forward
contracts with electricity generation companies on notional quantities amounting
to approximately 35.6 million megawatt hours ("mWh") through the year 2007. The
average fixed price to be paid by Australian Electric Operations was $19.07 per
mWh compared to the average price of similar contracts at December 31, 1997 of
$18.66. It is not practicable to determine the fair value of the forward
contracts held by Australian Electric Operations because of the limited number
of transactions and the inactive trading in the electricity spot market.
P.54 PACIFICORP
<PAGE>
At December 31, 1997, Domestic Electric Operations and TPC had open NYMEX
futures contracts as follows:
<TABLE>
<CAPTION>
1997 1996
ELECTRICITY GAS ELECTRICITY
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
OPEN CONTRACTS
(number)
Purchase 489 303 67
Sell 110 1,399 --
NOTIONAL QUANTITIES
(mWh/MMBtu)
Purchase 359,900 3,030,000 49,300
Sell 81,000 13,990,000 --
FAIR MARKET VALUE
(millions of dollars)
Purchase $ (0.7) $(1.1) $ 0.2
Sell 0.1 (0.5) --
</TABLE>
TRADING ACTIVITIES -- PPM began trading wholesale power in the eastern United
States energy markets during 1996. Such transactions involve delivery of
electricity, which is accounted for as revenue or purchased power expense. At
December 31, 1997, PPM had open purchase positions for approximately $866
million, or 33 million mWh, and open sell positions for approximately $848
million, or 32 million mWh. At December 31, 1997, TPC had open purchase
positions involving the delivery of natural gas for approximately $35 million,
or 19,000 millions of cubic feet ("MMcf"). In addition, TPC had open sell
positions for approximately $17 million or 7,000 MMcf. The fair market values of
these open positions at December 31, 1997 for PPM and TPC were $(1) million and
$6 million, respectively.
NOTE 11
FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term debt $4,755.3 $4,907.2 $5,026.3 $5,100.8
Preferred Securities 340.4 355.4 209.7 210.9
Preferred stock
subject to
mandatory
redemption 175.0 194.1 178.0 195.8
Derivatives relating to
Currency 45.3 45.3 (21.5) (21.5)
Interest (9.4) (54.3) (10.8) (52.5)
</TABLE>
The carrying value of cash and cash equivalents, receivables, payables, accrued
liabilities and short-term borrowings approximates fair value because of the
short-term maturity of these instruments. The fair value of the finance note
receivable approximates its carrying value at December 31, 1997.
The fair value of the Company's long-term debt has been estimated by
discounting projected future cash flows, using the current rate at which similar
loans would be made to borrowers with similar credit ratings and for the same
maturities. Current maturities of long-term debt were included. The fair value
of the Preferred Securities was based on closing market prices and the fair
value of redeemable preferred stock was based on bid prices from an investment
bank.
The fair value of interest rate derivatives and currency swaps
is the estimated amount the Company would receive (pay) to terminate the
agreements, taking into account current interest and currency exchange rates and
the current creditworthiness of the agreement counterparties.
NOTE 12
COMMITMENTS AND CONTINGENCIES
The Company is subject to numerous environmental laws including: the Federal
Clean Air Act, as enforced by the Environmental Protection Agency and various
state agencies; the 1990 Clean Air Act Amendments; the Endangered Species Act as
it relates to certain potentially endangered species of salmon; the
Comprehensive Environmental Response, Compensation and Liability Act, relating
to environmental cleanups; along with the Federal Resource Conservation and
Recovery Act and the Clean Water Act relating to water quality. These laws could
potentially impact future operations. For those contingencies identified at
December 31, 1997, principally the Superfund sites where the Company has been or
may be designated as a potentially responsible party and Clean Air Act matters,
future costs associated with the disposition of these matters are not expected
to be material to the Company's consolidated financial statements.
The Company's mining operations are subject to reclamation and closure
requirements. The Company monitors these requirements and periodically revises
its cost estimates to meet existing legal and regulatory requirements of the
various jurisdictions in which it operates. Costs for reclamation are accrued
using the units-of-production method such that estimated final mine reclamation
and closure costs are fully accrued at completion of mining activities, except
where the Company has decided to close a mine. When a mine is closed, the
Company records the estimated cost to complete the mine closure. This is
consistent with industry practices, and the Company believes that it has
adequately provided for its reclamation obligations.
PACIFICORP P.55
<PAGE>
The Company and its subsidiaries are parties to various legal claims,
actions and complaints, certain of which involve material amounts. Although
the Company is unable to predict with certainty whether or not it will
ultimately be successful in these legal proceedings or, if not, what the
impact might be, management currently believes that disposition of these
matters will not have a materially adverse effect on the Company's
consolidated financial statements.
CONSTRUCTION AND OTHER -- Construction and acquisitions are estimated at $830
million for 1998, excluding amounts relating to the proposed acquisition of TEG.
As a part of these programs, substantial commitments have been made.
LEASES -- The Companies have certain properties under leases with various
expiration dates and renewal options. Rentals on lease renewals are subject to
negotiation. Certain leases provide for options to purchase at fair market
value. The Companies are also committed to pay all taxes, expenses of operation
(other than depreciation) and maintenance applicable to the leased property.
Net rent expense for the years ended December 31, 1997, 1996 and 1995 was
$20 million, $12 million and $13 million, respectively.
Future minimum lease payments under noncancelable operating leases are
$8 million, $6 million, $5 million, $5 million and $3 million for 1998
through 2002, respectively.
JOINTLY OWNED PLANTS -- At December 31, 1997, Domestic Electric Operations'
participation in jointly owned plants was as follows:
<TABLE>
<CAPTION>
ELECTRIC PLANT CONSTRUCTION
OPERATIONS' IN ACCUMULATED WORK IN
MILLIONS OF DOLLARS SHARE SERVICE DEPRECIATION PROGRESS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Centralia 47.5% $181.5 $111.1 $ 0.5
Jim Bridger
Units
1, 2, 3 and 4 66.7 796.1 320.3 4.5
Trojan(a) 2.5 -- -- --
Colstrip
Units 3 and 4 10.0 205.2 68.0 --
Hunter Unit 1 93.8 260.9 107.1 1.4
Hunter Unit 2 60.3 188.6 71.2 10.3
Wyodak 80.0 304.9 102.9 0.4
Craig Station
Units 1 and 2 19.3 150.6(b) 59.4 1.1
Hayden Station
Unit 1 24.5 18.6(b) 12.0 6.0
Hayden Station
Unit 2 12.6 15.6(b) 8.8 3.4
Hermiston(c) 50.0 156.7 10.9 --
</TABLE>
(a) Plant, inventory, fuel and decommissioning costs totaling $23 million
relating to the Trojan Plant were included in regulatory assets-net at
December 31, 1997.
(b) Excludes unallocated acquisition adjustments of $114 million at December
31, 1997.
(c) Additionally, the Company has contracted to purchase the remaining 50% of
the output of the plant.
Under the joint agreements, each participating utility is responsible for
financing its share of construction, operating and leasing costs. Domestic
Electric Operations' portion is recorded in its applicable operations,
maintenance and tax accounts.
LONG-TERM WHOLESALE SALES AND PURCHASED POWER CONTRACTS -- Domestic Electric
Operations manages its energy resource requirements by integrating long-term
firm, short-term and spot market purchases with its own generating resources to
economically dispatch the system and meet commitments for wholesale sales and
retail load growth. The long-term wholesale sales commitments include contracts
with minimum sales requirements of $485 million in 1998, $450 million in 1999,
$415 million in 2000, $316 million in 2001 and $308 million in 2002. As part of
its energy resource portfolio, Domestic Electric Operations acquires a portion
of its power through long-term purchases and/or exchange agreements which
require minimum fixed payments of $320 million in 1998, $316 million in 1999,
$314 million in 2000, $290 million in 2001 and $299 million in 2002. The
purchase contracts include agreements with the Bonneville Power Administration,
the Hermiston Plant and a number of cogenerating facilities.
Excluded from the minimum fixed annual payments above are commitments to
purchase power from several hydroelectric projects under long-term
arrangements with public utility districts. These purchases are made on a
"cost-of-service" basis for a stated percentage of project output and for a
like percentage of project annual costs (operating expenses and debt
service). These costs are included in operations expense. Domestic Electric
Operations is required to pay its portion of the debt service, whether or not
any power is produced. The arrangements provide for nonwithdrawable power and
the majority also provide for additional power, withdrawable by the districts
upon one to five years' notice. For 1997, such purchases approximated 3% of
energy requirements.
At December 31, 1997, Domestic Electric Operations' share of long-term
arrangements with public utility districts was as follows:
<TABLE>
<CAPTION>
GENERATING YEAR CONTRACT CAPACITY PERCENTAGE ANNUAL
FACILITY EXPIRES (kW) OF OUTPUT COSTS(a)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Wanapum 2009 155,444 18.7% $ 4.4
Priest Rapids 2005 109,602 13.9 3.5
Rocky Reach 2011 64,297 5.3 2.9
Wells 2018 59,617 7.7 2.0
------------------------------------------------
Total 388,960 $ 12.8
------------------------------------------------
------------------------------------------------
</TABLE>
(a) Annual costs, in millions of dollars, include debt service of $7 million.
The Company has a 4% interest in the Intermountain Power Project (the
"Project"), located in central Utah. The Company and the city of Los Angeles
have agreed that the City will purchase capacity and energy from Company
plants equal to the Company's 4% entitlement of the Project at a price
equivalent to 4% of the expenses and debt service of the Project.
P. 56 PACIFICORP
<PAGE>
FUEL CONTRACTS -- Domestic Electric Operations has take or pay coal and natural
gas contracts which require minimum fixed payments of $83 million for 1998 and
1999, $90 million for 2000, $62 million for 2001 and $64 million for 2002.
NOTE 13
INCOME TAXES
The Company's combined federal and state effective income tax rate from
continuing operations was 33% in 1997, 35% in 1996 and 32% in 1995. The
difference between taxes calculated as if the statutory federal tax rate of 35%
was applied to income from continuing operations before income taxes and the
recorded tax expense is reconciled as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS/FOR THE YEAR 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed Federal
Income Taxes $ 117.2 $ 233.3 $ 207.8
-----------------------------------
Increase (Reduction) in
Tax Resulting from
Depreciation differences 14.2 12.8 9.7
Investment tax credits (8.5) (9.3) (9.2)
Audit settlement -- 0.5 (16.8)
Affordable housing credits (13.4) (10.6) (8.4)
Other items capitalized
and miscellaneous
differences (9.4) (8.4) (7.7)
-----------------------------------
Total (17.1) (15.0) (32.4)
-----------------------------------
Federal Income Tax 100.1 218.3 175.4
State Income Tax,
Net of Federal Income Tax
Benefit 9.4 18.1 16.4
-----------------------------------
Total Income Tax Expense $ 109.5 $ 236.4 $ 191.8
-----------------------------------
-----------------------------------
</TABLE>
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS/FOR THE YEAR 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT
Federal $ 173.9 $ 186.3 $ 135.8
State 17.2 24.0 16.9
Foreign -- -- 1.1
-----------------------------------
Total 191.1 210.3 153.8
-----------------------------------
DEFERRED
Federal (70.2) 22.4 37.2
State (2.9) 4.9 9.0
Foreign -- 8.1 1.0
-----------------------------------
Total (73.1) 35.4 47.2
-----------------------------------
INVESTMENT TAX CREDITS (8.5) (9.3) (9.2)
-----------------------------------
Total Income Tax Expense $ 109.5 $ 236.4 $ 191.8
-----------------------------------
-----------------------------------
</TABLE>
The tax effects of significant items comprising the Company's net
deferred tax liability were as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS/DECEMBER 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES
Property, plant and equipment $1,195.0 $1,177.1
Regulatory assets 704.1 733.1
Other deferred liabilities 84.3 77.9
DEFERRED TAX ASSETS
Regulatory liabilities (54.0) (57.1)
Book reserves not deductible for tax (61.3) (55.0)
Foreign net operating loss (47.5) (28.3)
Foreign currency adjustment (46.4) 8.0
Pension accrual (39.9) (8.1)
Other deferred assets (58.2) (46.6)
-----------------------
Net Deferred Tax Liability $1,676.1 $1,801.0
-----------------------
-----------------------
</TABLE>
The Company's 1991, 1992 and 1993 federal income tax returns are
currently under examination by the Internal Revenue Service (the "IRS"). The
Company has received an examination report for 1989 and 1990 proposing
adjustments that would increase current income taxes payable by $14 million.
The Company filed a protest of certain proposed adjustments on July 30, 1996
and is currently holding discussions with the Appeals Division of the IRS.
The Company made income tax payments of $134 million, $208 million and
$186 million in 1997, 1996 and 1995, respectively.
NOTE 14
EMPLOYMENT BENEFIT PLANS
RETIREMENT PLANS -- The Companies have pension plans covering substantially
all of their employees. Benefits under the plan in the United States are
based on the employee's years of service and average monthly pay in the 60
consecutive months of highest pay out of the last 120 months, with
adjustments to reflect benefits estimated to be received from Social
Security. Pension costs are funded annually by no more than the maximum
amount of pension expense which can be deducted for federal income tax
purposes. Unfunded prior service costs are amortized over the remaining
service period of employees expected to receive benefits. At December 31,
1997, plan assets were primarily invested in common stocks, bonds and United
States government obligations.
PACIFICORP P. 57
<PAGE>
All permanent employees of Powercor engaged prior to October 4, 1994 are
members of Division B or C of the Superannuation Fund (the "Fund") which
provides defined benefits in the form of pensions (Division B) or lump sums
(Division C). Both defined benefit Funds are closed to new members. Members
who choose to contribute do so at rates of 3% or 6% of eligible salaries.
Powercor employees engaged after October 4, 1994 are members of Division D of
the Fund, which is a defined contribution fund in which members may
contribute up to 20% of eligible salaries. At December 31, 1997, Powercor was
no longer making contributions to Division B and C funds due to surplus
amounts in these funds. During 1997, Powercor contributed to the Division D
Fund at rates ranging from 6%-10% of eligible salaries.
Net pension cost is summarized as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS/FOR THE YEAR 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost -- benefits earned $ 27.2 $ 31.4 $ 20.7
Interest cost on projected
benefit obligation 81.6 78.3 69.3
Actual gain on plan assets (76.5) (66.3) (120.9)
Net amortization and
deferral 9.2 8.9 81.5
Regulatory deferral
(see Note 4) -- 14.2 29.4
----------------------------------
Net Pension Cost $ 41.5 $ 66.5 $ 80.0
----------------------------------
----------------------------------
</TABLE>
The funded status, net pension liability and significant assumptions are
as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS/DECEMBER 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of
benefit obligations
Vested benefit obligation $ 993.5 $ 913.7
-------------------------
Accumulated benefit obligation 1,052.4 987.6
-------------------------
Projected benefit obligation 1,216.2 1,114.3
Plan assets at fair value 1,003.5 871.0
-------------------------
Projected benefit obligation
in excess of plan assets 212.7 243.3
Unrecognized prior service cost (15.2) (13.7)
Unrecognized net loss (4.9) (86.7)
Unrecognized net obligation (80.0) (10.2)
Minimum liability adjustment 5.5 2.9
-------------------------
Net Pension Liability $ 118.1 $ 135.6
-------------------------
-------------------------
Discount rate 6.25%-7% 7.25%-7.5%
Expected long-term rate
of return on assets 7.5%-9.25% 8.5%-9%
Rate of increase in
compensation levels 4%-5% 4.5%-6%
</TABLE>
OTHER POSTRETIREMENT BENEFITS -- Domestic Electric Operations provides health
care and life insurance benefits through various plans for eligible retirees
on a basis substantially similar to those who are active employees. The cost
of postretirement benefits is accrued over the active service period of
employees. The transition obligation represents the unrecognized prior
service cost and is being amortized over a period of 20 years. For those
employees retired at January 1, 1993, the Company funds postretirement
benefit expense on a pay-as-you-go basis and has an unfunded accrued
liability of $58 million at December 31, 1997. For those employees retiring
after January 1, 1993, the Company funds postretirement benefit expense
through a combination of funding vehicles. The Company funded $16 million and
$28 million of postretirement benefit expense during 1997 and 1996,
respectively. These funds are invested in common stocks, bonds and United
States government obligations.
The net periodic postretirement benefit cost is summarized as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS/FOR THE YEAR 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost -- benefits earned $ 7.2 $ 6.9 $ 6.2
Interest cost on accumulated
postretirement
benefit obligation 21.8 21.8 26.7
Amortization of
transition obligation 11.9 12.6 14.0
Regulatory deferral 6.4 3.4 (4.5)
Net asset gain during the period
deferred for future recognition 18.9 3.5 2.6
Actual gain on plan assets (31.5) (12.6) (8.8)
--------------------------------
Net Periodic Postretirement
Benefit Cost $34.7 $35.6 $36.2
--------------------------------
--------------------------------
</TABLE>
The accumulated postretirement benefit obligation ("APBO") was as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS/DECEMBER 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Retirees and dependents $172.2 $168.0
Fully eligible active plan
participants 12.0 10.1
Other active plan participants 143.2 131.0
----------------------
APBO 327.4 309.1
Plan assets at fair value 179.8 135.1
----------------------
APBO in excess of plan assets 147.6 174.0
Unrecognized transition obligation (209.3) (223.2)
Unrecognized net gain 64.3 51.2
----------------------
Accrued Postretirement
Benefit Obligation $ 2.6 $ 2.0
----------------------
----------------------
Discount rate 7% 7.5%
Estimated long-term rate of
return on assets 9.3% 9%
Initial health care cost trend
rate -- under 65 8.3% 8.8%
Initial health care cost trend
rate -- over 65 8.3% 8.4%
Ultimate health care cost trend rate 4.5% 4.5%
</TABLE>
P. 58 PACIFICORP
<PAGE>
The assumed health care cost trend rate gradually decreases over eight
years. The health care cost trend rate assumption has a significant effect on
the amounts reported. Increasing the assumed health care cost trend rate by
one percentage point would have increased the APBO as of December 31, 1997 by
$29 million, and the annual net periodic postretirement benefit costs by $3
million.
POSTEMPLOYMENT BENEFITS -- Domestic Electric Operations provides certain
postemployment benefits to former employees and their dependents during the
period following employment but before retirement. The costs of these benefits
are accrued as they are incurred. Benefits include salary continuation,
severance benefits, disability benefits and continuation of health care benefits
for terminated and disabled employees and workers compensation benefits. Accrued
costs for postemployment benefits were $13 million and $5 million in 1997 and
1996, respectively.
PENDING EARLY RETIREMENT OFFER -- The Company has offered enhanced early
retirement to approximately 1,200 employees who have until March 31, 1998 to
accept the offer. The cost of the enhancement will have an impact on the funding
status of the retirement and other postretirement benefit plans. However, the
Company intends to fund a substantial portion of the increase in the accumulated
benefit obligation.
STOCK INCENTIVE PLAN -- During 1997, the Company formalized a Stock Incentive
Plan (the "Plan") under which selected employees, officers and directors and
selected nonemployee agents, consultants, advisors and independent contractors
may be granted options to purchase the Company's common stock. Options generally
become exercisable in three equal installments on each of the first through
third anniversaries of the grant date and have a maximum term of ten years.
During 1997, options were granted to 193 officers and employees. Under the Plan
options for 1,322,500 shares were granted on June 3, 1997 and options for
193,500 shares were granted on August 12, 1997 at exercise prices of $19.75 and
$21.25, respectively. The weighted average estimated fair value of options
granted was $2.78 per share. These options to purchase the Company's common
stock were issued at 100% of market price on the dates the options were granted.
None of the options were exercisable as of December 31, 1997. During 1997,
options for 19,000 shares relating to the June 3, 1997 grant were forfeited. As
permitted by SFAS 123, the Company has elected to account for the Plan under APB
25. Accordingly, no compensation expense has been recognized for the Plan. Had
compensation cost for the Plan been determined based on the fair value at the
grant date consistent with SFAS 123, there would have been no impact on the
Company's net income and earnings per common share.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
used: dividend yield of 5.5%, risk-free interest rate of 6.8%, expected life
of the options of ten years and volatility of 15%.
NOTE 15
ACQUISITIONS AND DISPOSITIONS
On April 15, 1997, Holdings, through a subsidiary, acquired all of the
outstanding shares of common stock of TPC, a natural gas gathering, processing,
storage and marketing company based in Houston, Texas, for approximately $265
million in cash and assumed debt of approximately $140 million. Following
completion of a tender offer, TPC became a wholly owned subsidiary of Holdings
through a cash merger at the same price. During May 1997, TPC retired $131
million of its outstanding long-term debt. This transaction was funded with
capital contributions from PacifiCorp.
On December 1, 1997, TPC sold all of the capital stock of three
subsidiaries that hold its natural gas gathering and processing systems for
$195 million in cash, before tax payments of $23 million. No gain or loss was
recognized on the sale.
On November 5, 1997, Holdings completed the sale of PGC for
approximately $150 million in cash. An after-tax gain on the sale of $30
million, or $0.10 per share, was recognized in the fourth quarter of 1997.
In September 1996, a consortium, known as the Hazelwood Power
Partnership, purchased a 1,600 megawatt, coal-fired generating station and
associated coal mine in Victoria, Australia for approximately $1.9 billion.
The consortium financed the acquisition of the Hazelwood Plant and mine with
approximately $858 million in equity contributions from the partners and $1
billion of nonrecourse borrowings at the partnership level. Holdings, which
has a 19.9% interest in the partnership, financed its $145 million portion of
the equity investment and the associated $12 million advance with long-term
borrowings in the United States.
On December 12, 1995, Holdings purchased Powercor, an electricity
distributor in Australia, for approximately $1.6 billion in cash. Powercor is
the largest electricity distribution company in the State of Victoria. The
acquisition was accounted for as a purchase and the results of operations of
Powercor have been included in the consolidated financial statements since
December 12, 1995.
In February 1998, PFS agreed to sell its investments in affordable
housing for cash proceeds of approximately $81 million and assumption of debt
of approximately $161 million. This sale transaction will not have a material
impact on 1998 earnings.
PACIFICORP P. 59
<PAGE>
NOTE 16
SELECTED FINANCIAL AND SEGMENT INFORMATION
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS, EXCEPT PER SHARE
INFORMATION/FOR THE YEAR 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES
Domestic Electric Operations $3,706.9 $2,991.8 $2,646.1 $2,686.2 $2,560.8
Australian Electric Operations 716.2 658.8 25.9 -- --
Unregulated Energy Trading(a) 1,729.0 11.7 -- -- --
Other Operations(b) 125.9 141.4 134.8 153.7 196.4
-------------------------------------------------------------------------
Total $6,278.0 $3,803.7 $2,806.8 $2,839.9 $2,757.2
- ------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
Domestic Electric Operations $ 601.3 $869.8 $ 800.9 $ 819.3 $ 784.3
Australian Electric Operations 150.5 127.4 5.5 -- --
Unregulated Energy Trading(a) (8.2) 0.1 -- -- --
Other Operations(b) 58.9 89.1 84.2 38.3 44.1
-------------------------------------------------------------------------
Total $ 802.5 $1,086.4 $ 890.6 $ 857.6 $ 828.4
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 663.7 $ 504.9 $ 505.0 $ 468.0 $ 479.1
- ------------------------------------------------------------------------------------------------------------------------
EARNINGS CONTRIBUTION (LOSS) ON COMMON STOCK
Continuing operations
Domestic Electric Operations $ 165.5 $ 341.5 $ 276.4 $ 339.8 $ 322.3
Australian Electric Operations 54.2 31.9 0.7 -- --
Unregulated Energy Trading(a) (7.5) (0.1) -- -- --
Other Operations(b) (9.6) 27.1 86.2 18.0 10.2
-------------------------------------------------------------------------
Total 202.6 400.4 363.3 357.8 332.5
Discontinued operations(c) 454.3 74.7 103.0 70.5 103.3
Extraordinary item(d) (16.0) -- -- -- --
Cumulative effect of change in
accounting for income taxes -- -- -- -- 4.0
-------------------------------------------------------------------------
Total $ 640.9 $ 475.1 $ 466.3 $ 428.3 $ 439.8
- ------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE -- BASIC AND DILUTIVE
Continuing operations
Domestic Electric Operations $ 0.56 $ 1.17 $ 0.97 $ 1.20 $ 1.17
Australian Electric Operations 0.18 0.11 -- -- --
Unregulated Energy Trading(a) (0.03) -- -- -- --
Other Operations(b) (0.03) 0.09 0.31 0.06 0.04
-------------------------------------------------------------------------
Total 0.68 1.37 1.28 1.26 1.21
Discontinued operations(c) 1.53 0.25 0.36 0.25 0.38
Extraordinary item(d) (0.05) -- -- -- --
Cumulative effect of change in
accounting for income taxes -- -- -- -- 0.01
-------------------------------------------------------------------------
Total $ 2.16 $ 1.62 $ 1.64 $ 1.51 $ 1.60
- ------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 1.08 $ 1.08 $ 1.08 $ 1.08 $ 1.08
- ------------------------------------------------------------------------------------------------------------------------
MARKET PRICE PER COMMON SHARE(e) $27 5/16 $20 1/2 $ 21 1/8 $ 18 1/8 $19 1/4
- ------------------------------------------------------------------------------------------------------------------------
CAPITALIZATION
Short-term debt $ 555 $ 903 $ 1,132 $ 513 $ 668
Long-term debt 4,415 4,829 4,509 3,391 3,497
Preferred securities of Trust 340 210 -- -- --
Redeemable preferred stock 175 178 219 219 219
Preferred stock 66 136 312 367 367
Common equity 4,321 4,032 3,633 3,460 3,263
-------------------------------------------------------------------------
Total $ 9,872 $10,288 $ 9,805 $ 7,950 $ 8,014
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 13,880 $13,812 $ 13,167 $ 11,000 $11,053
- ------------------------------------------------------------------------------------------------------------------------
TOTAL EMPLOYEES(e) 10,087 10,118 10,418 10,083 10,630
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Unregulated Energy Trading includes the natural gas and wholesale
electricity trading activities of TPC and PPM, respectively. (b) Other
Operations includes the operations of PFS and PGC, as well as the activities of
Holdings, including financing costs. (c) Discontinued operations includes the
Company's interest in PTI for all periods presented and TRT Communications, Inc.
for 1993. (d) Extraordinary item includes a regulatory asset impairment
pertaining to generation resources that are allocable to operations in
California and Montana. (e) Unaudited.
P. 60 PACIFICORP
<PAGE>
DOMESTIC ELECTRIC OPERATIONS
<TABLE>
<CAPTION>
5-YEAR
1997 TO 1996 COMPOUND
MILLIONS OF DOLLARS, EXCEPT AS PERCENTAGE ANNUAL
NOTED/FOR THE YEAR 1997 1996 1995 1994 1993 COMPARISON GROWTH
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Residential $ 814.0 $ 801.4 $ 739.7 $ 746.0 $ 738.8 2% 3%
Commercial 640.9 623.3 576.9 571.7 546.1 3 4
Industrial 709.9 719.3 708.8 742.3 708.0 (1) --
Other 31.7 32.5 29.7 30.7 29.8 (2) 1
--------------------------------------------------------------------------
Retail sales 2,196.5 2,176.5 2,055.1 2,090.7 2,022.7 1 2
--------------------------------------------------------------------------
Wholesale -- firm 1,289.3 635.4 487.7 456.2 422.5 103 29
Wholesale -- nonfirm 138.7 103.4 32.3 76.5 77.3 34 14
--------------------------------------------------------------------------
Wholesale trading sales 1,428.0 738.8 520.0 532.7 499.8 93 27
--------------------------------------------------------------------------
Other 82.4 76.5 71.0 62.8 38.3 8 21
--------------------------------------------------------------------------
Total 3,706.9 2,991.8 2,646.1 2,686.2 2,560.8 24 9
--------------------------------------------------------------------------
EXPENSES
Fuel 454.2 443.0 431.6 483.0 447.4 3 --
Purchased power 1,296.5 618.7 386.7 394.5 369.0 110 33
Other operations 292.0 276.9 273.7 263.8 265.0 5 2
Maintenance 178.0 167.3 168.4 174.5 172.2 6 1
Administrative and
general 227.8 176.3 160.5 142.7 138.2 29 10
Depreciation and
amortization 389.1 343.4 320.4 301.6 280.5 13 6
Taxes, other than
income taxes 97.6 96.4 103.9 106.8 104.2 1 (2)
Special charges 170.4 -- -- -- -- * *
--------------------------------------------------------------------------
Total 3,105.6 2,122.0 1,845.2 1,866.9 1,776.5 46 12
--------------------------------------------------------------------------
INCOME FROM OPERATIONS 601.3 869.8 800.9 819.3 784.3 (31) (2)
Interest expense 319.0 291.8 311.9 264.3 270.4 9 3
Interest capitalized (12.2) (11.4) (14.9) (14.5) (13.9) 7 (6)
Other (income) expense -- net (5.8) 1.2 (25.3) (30.2) (13.1) * *
Income tax expense 112.0 216.9 214.1 220.2 179.3 (48) (7)
--------------------------------------------------------------------------
NET INCOME 188.3 371.3 315.1 379.5 361.6 (49) (5)
PREFERRED DIVIDEND
REQUIREMENT 22.8 29.8 38.7 39.7 39.3 (23) (9)
--------------------------------------------------------------------------
EARNINGS CONTRIBUTION(a) $ 165.5 $ 341.5 $ 276.4 $ 339.8 $ 322.3 (52) (4)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
IDENTIFIABLE ASSETS $ 9,863 $ 9,864 $ 9,599 $ 9,372 $ 9,055 -- 4
CAPITAL SPENDING $ 490 $ 596 $ 455 $ 638 $ 637 (18) (11)
</TABLE>
* Not a meaningful number.
(a) Does not reflect elimination of interest on intercompany borrowing
arrangements and includes income taxes on a separate-company basis.
PACIFICORP P. 61
<PAGE>
DOMESTIC ELECTRIC OPERATIONS STATISTICS (a)
<TABLE>
<CAPTION>
5-YEAR
1997 TO 1996 COMPOUND
MILLIONS OF DOLLARS, EXCEPT AS PERCENTAGE ANNUAL
NOTED/FOR THE YEAR 1997 1996 1995 1994 1993 COMPARISON GROWTH
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ENERGY SALES
(Millions of kWh)
Residential 12,902 12,819 12,030 12,127 12,055 1% 3%
Commercial 11,868 11,497 10,797 10,645 10,085 3 4
Industrial 20,674 20,332 19,748 20,306 19,671 2 1
Other 705 640 592 623 602 10 3
--------------------------------------------------------------------------
Retail sales 46,149 45,288 43,167 43,701 42,413 2 2
--------------------------------------------------------------------------
Wholesale -- firm 51,857 23,189 13,946 12,418 11,919 124 38
Wholesale -- nonfirm 7,286 6,476 2,430 3,207 3,030 13 20
--------------------------------------------------------------------------
Wholesale sales 59,143 29,665 16,376 15,625 14,949 99 35
--------------------------------------------------------------------------
Total 105,292 74,953 59,543 59,326 57,362 40 14
--------------------------------------------------------------------------
--------------------------------------------------------------------------
ENERGY SOURCE (%)
Coal 43 60 74 79 77 (28) (12)
Hydroelectric 5 7 7 5 6 (29) 5
Other 2 1 2 2 1 100 --
Purchase and
exchange contracts 50 32 17 14 16 56 31
--------------------------------------------------------------------------
NUMBER OF RETAIL CUSTOMERS
(Thousands)
Residential 1,228 1,194 1,167 1,147 1,126 3 2
Commercial 170 167 160 158 154 2 2
Industrial 36 37 35 34 33 (3) 3
Other 4 4 4 3 4 -- 6
--------------------------------------------------------------------------
Total 1,438 1,402 1,366 1,342 1,317 3 2
--------------------------------------------------------------------------
--------------------------------------------------------------------------
RESIDENTIAL CUSTOMERS
Average annual usage (kWh) 10,644 10,866 10,395 10,646 10,811 (2) 1
Average annual revenue
per customer (Dollars) 672 679 639 655 663 (1) 1
Revenue per kWh (Cents) 6.3 6.3 6.1 6.1 6.1 -- --
MILES OF LINE
Transmission 15,000 14,900 14,900 14,900 14,900 1 --
Distribution
-- overhead 45,000 45,000 44,900 44,800 44,700 -- --
-- underground 10,000 9,600 9,100 8,800 8,200 4 5
SYSTEM PEAK DEMAND
(Megawatts)
Net system load (b)
-- summer 7,110 7,257 6,855 7,151 6,554 (2) 1
-- winter 7,403 7,615 7,030 7,174 7,268 (3) 1
Total firm load
-- summer (c) 10,871 10,572 8,899 8,830 8,390 3 5
-- winter 10,830 10,775 8,904 8,903 8,838 1 5
SYSTEM CAPABILITY
(Megawatts)(d)
-- summer 12,343 12,115 10,224 10,020 9,757 2 5
-- winter 12,618 12,160 10,994 10,391 9,916 4 5
</TABLE>
(a)Unaudited. (b)Excludes off-system sales. (c) Includes firm off-system sales.
(d) Generating capability and firm purchases at time of firm peak.
P. 62 PACIFICORP
<PAGE>
AUSTRALIAN ELECTRIC OPERATIONS
<TABLE>
<CAPTION>
1997 TO 1996
MILLIONS OF DOLLARS, EXCEPT AS PERCENTAGE
NOTED/FOR THE YEAR 1997 1996 1995 COMPARISON
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
POWERCOR EARNINGS CONTRIBUTION(a)
REVENUES
Residential $ 239.2 $ 239.4 $ 10.5 --%
Commercial 207.9 165.5 5.9 26
Industrial 191.8 179.3 6.4 7
Other 44.4 44.4 2.6 --
-----------------------------------------
Energy sales 683.3 628.6 25.4 9
Other 32.9 30.2 0.5 9
-----------------------------------------
Total 716.2 658.8 25.9 9
-----------------------------------------
EXPENSES
Purchased power 308.5 305.1 11.0 1
Other operations 100.7 62.3 2.5 62
Maintenance 33.3 50.0 0.3 (33)
Administrative and general 54.9 40.7 3.4 35
Depreciation and amortization 67.1 71.6 3.1 (6)
Taxes, other than income
taxes 1.2 1.7 0.1 (29)
-----------------------------------------
Total 565.7 531.4 20.4 6
-----------------------------------------
INCOME FROM OPERATIONS 150.5 127.4 5.5 18
Interest expense 63.5 75.2 3.8 (16)
Other (income) expense -- net (1.8) 0.4 0.5 *
Income tax expense 32.9 19.1 0.5 72
-----------------------------------------
POWERCOR EARNINGS CONTRIBUTION $ 55.9 $ 32.7 $ 0.7 71
-----------------------------------------
-----------------------------------------
HAZELWOOD EARNINGS CONTRIBUTION(a) $ (1.7) $ (0.8) $ -- (113)
-----------------------------------------
-----------------------------------------
IDENTIFIABLE ASSETS $ 1,786 $ 2,065 $ 1,751 (14)
CAPITAL SPENDING $ 84 $ 225 $ 1,591 (63)
ENERGY SALES (Millions of kWh)(b)
Residential 2,683 2,608 112 3
Commercial 3,082 1,926 66 60
Industrial 4,755 3,282 152 45
Other 524 494 32 6
-----------------------------------------
Total 11,044 8,310 362 33
-----------------------------------------
-----------------------------------------
NUMBER OF CUSTOMERS(b)(c)
Residential 459,780 453,978 448,623 1
Commercial
Franchise 48,438 47,918 47,358 1
Contestable 1,383 680 17 103
Industrial
Franchise 8,899 8,005 8,422 11
Contestable 541 417 5 30
Other
Franchise 35,842 35,808 35,700 --
Contestable 7 8 -- (13)
-----------------------------------------
Total 554,890 546,814 540,125 1
-----------------------------------------
-----------------------------------------
</TABLE>
* Not a meaningful number.
(a) Results of operations are included since dates of acquisition, December 12,
1995 for Powercor and September 13, 1996 for Hazelwood.
(b) Unaudited.
(c) Aggregate number of customers in Powercor's distribution service area,
together with contestable customers located outside of Powercor's distribution
service area.
PACIFICORP P. 63
<PAGE>
UNREGULATED ENERGY TRADING
Unregulated Energy Trading includes the natural gas and wholesale electricity
trading activities of TPC and PPM, respectively. TPC was purchased on April 15,
1997. Natural gas revenues, gross margin and net income for 1997 include $19
million, $14 million, and $3 million, respectively, relating to the natural gas
gathering and processing operations of TPC that were sold in December 1997.
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS/FOR THE YEAR 1997 1996
- ------------------------------------------------------------
<S> <C> <C>
REVENUES
Natural gas $ 815.8 $ --
Electricity 913.2 11.7
-----------------------
Total 1,729.0 11.7
-----------------------
-----------------------
COST OF SALES
Natural gas 801.0 --
Purchased electric power 909.3 8.0
-----------------------
GROSS MARGIN 18.7 3.7
Depreciation and amortization 10.7 --
Administrative and other 16.2 3.6
-----------------------
INCOME (LOSS) FROM OPERATIONS
Natural gas (5.8) --
Electricity (2.4) 0.1
-----------------------
Total (8.2) 0.1
-----------------------
INTEREST EXPENSE 2.8 0.2
-----------------------
-----------------------
NET LOSS
Natural gas (5.9) --
Electricity (1.6) (0.1)
-----------------------
Total $(7.5) $ (0.1)
-----------------------
-----------------------
ENERGY SALES(a)
Natural gas (MMcf)(b) 283,000 --
Electricity (millions of kWh) 35,800 497
IDENTIFIABLE ASSETS $ 478 $ 7
CAPITAL SPENDING $ 75 $ --
</TABLE>
(a) Unaudited. (b) Excludes volumes relating to natural gas gathering and
processing activities.
OTHER OPERATIONS
Other Operations include the operations of PFS, PGC and several start-up-phase
ventures, as well as the activities of Holdings, including financing costs. PGC
assets were sold on November 5, 1997 and in February 1998 a definitive agreement
was reached to sell the real estate assets of PFS.
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS/FOR THE YEAR 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS CONTRIBUTION
PFS $ 30.2 $ 34.1 $ 30.4 $ 3.0 $ (3.1)
PGC 10.4 7.8 5.6 8.5 6.5
Tax settlement -- -- 32.2 -- --
Holdings and other (50.2) (14.8) 18.0 6.5 6.8
----------------------------------------------
Total $ (9.6) $27.1 $ 86.2 $ 18.0 $10.2
----------------------------------------------
----------------------------------------------
IDENTIFIABLE ASSETS
PFS 692 708 697 731 1,116
PGC -- 123 116 113 122
Holdings and other(a) 1,061 276 253 252 251
----------------------------------------------
Total $1,753 $1,107 $1,066 $1,096 $1,489
----------------------------------------------
----------------------------------------------
CAPITAL SPENDING $ 140 $ 56 $ 44 $ 13 $ 44
</TABLE>
(a) During 1997, the Company generated $1.8 billion of cash, excluding $370
million of current income tax liabilities, from sales of assets with carrying
values of $822 million. See Notes 3 and 15.
P. 64 PACIFICORP
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL INFORMATION
QUARTERLY FINANCIAL DATA (UNAUDITED)
MARCH JUNE SEPTEMBER DECEMBER
MILLIONS OF DOLLARS/EXCEPT PER SHARE AMOUNTS/QUARTER ENDED 31 30 30 31
<S> <C> <C> <C> <C>
1997
Revenues $ 1,041.8 $ 1,220.1 $ 2,010.6 $ 2,005.5
Income from operations 261.4 221.9 281.1 38.1
Income from continuing operations 102.7 75.7 46.9 0.1
Discontinued operations 18.3 19.1 27.1 389.8
Extraordinary item -- -- -- (16.0)
Net income 121.0 94.8 74.0 373.9
Earnings on common stock 114.9 88.7 68.2 369.1
Earnings per common share:
Continuing operations 0.32 0.24 0.14 (0.02)
Discontinued operations 0.07 0.06 0.09 1.31
Extraordinary item -- -- -- (0.05)
Common dividends paid and
declared per share 0.27 0.27 0.27 0.27
Common stock price
per share (NYSE)
High 21 3/4 22 3/8 23 3/8 27 5/16
Low 20 1/8 19 1/4 20 9/16 21 7/16
1996
Revenues $ 883.4 $ 856.6 $ 1,011.9 $ 1,051.8
Income from operations 276.9 218.5 297.3 293.7
Income from continuing operations 114.0 81.3 122.6 112.3
Discontinued operations 15.9 17.9 20.3 20.6
Net income 129.9 99.2 142.9 132.9
Earnings on common stock 120.9 90.2 136.6 127.4
Earnings per common share:
Continuing operations 0.36 0.25 0.39 0.37
Discontinued operations 0.06 0.06 0.07 0.06
Common dividends paid and
declared per share 0.27 0.27 0.27 0.27
Common stock price
per share (NYSE)
High 22 22 1/2 22 3/8 22
Low 20 1/8 19 1/2 19 5/8 19 7/8
</TABLE>
A significant portion of the operations are of a seasonal nature. Previously
reported quarterly information has been revised to reflect certain
reclassifications. These reclassifications had no effect on previously reported
consolidated net income.
In the fourth quarter of 1997, the Company recorded after-tax amounts as
follows: asset sales gains of $395 million or $1.33 per share, special charges
of $106 million, or $0.36 per share, and an extraordinary charge of $16 million,
or $0.05 per share. See Notes 4, 5, and 15. Additionally, in the fourth quarter
of 1997, the Company recorded after-tax depreciation adjustments of $10 million,
or $0.03 per share, and an SAP process reengineering charge of $9 million, or
$0.03 per share.
See Note 3 for information regarding discontinued operations.
On March 1, 1998, there were 115,693 common shareholders of record.
PACIFICORP P. 65
