UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ________________ to _______________
Commission File Number 1-5532-99
PORTLAND GENERAL ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
OREGON 93-0256820
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
121 SW SALMON STREET, PORTLAND, OREGON 97204
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (503) 464-8000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of July 31, 1998: 42,758,877 shares of Common Stock, $3.75
par value. (All shares are owned by Enron Corp.)
1
<PAGE>
TABLE OF CONTENTS
PAGE
NUMBER
DEFINITIONS ........................................................ 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income .................... 3
Consolidated Statements of Retained Earnings ......... 3
Consolidated Balance Sheets .......................... 4
Consolidated Statements of Cash Flow ................. 5
Notes to Consolidated Financial Statements ........... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........ 7
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings ........................... 15
Item 6 - Exhibits and Reports on Form 8-K ............ 15
Signature Page ....................................... 16
DEFINITIONS
AFDC...............................Allowance For Funds Used During Construction
BPA.............................................Bonneville Power Administration
Coyote Springs..................................Coyote Springs Generation Plant
Enron...............................................................Enron Corp.
ESP.....................................................Energy Service Provider
FERC.......................................Federal Energy Regulatory Commission
kWh...............................................................Kilowatt-Hour
Mill......................................................One tenth of one cent
MWa...........................................................Average megawatts
MWh...............................................................Megawatt-hour
NYMEX..............................................New York Mercantile Exchange
OPUC or the Commission.........................Oregon Public Utility Commission
PGE or the Company............................Portland General Electric Company
PUHCA................................Public Utility Holding Company Act of 1935
Trojan.....................................................Trojan Nuclear Plant
USDOE........................................United States Department of Energy
2
<PAGE>
Portland General Electric Company and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME FOR THE
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
(Millions of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES $260 $307 $574 $675
OPERATING EXPENSES
Purchased power and fuel 89 128 212 285
Production and distribution 34 35 68 63
Administrative and other 28 25 55 49
Depreciation and amortization 37 39 74 79
Taxes other than income taxes 13 14 29 29
Income taxes 18 21 43 60
---- ---- ---- ----
219 262 481 565
---- ---- ---- ----
NET OPERATING INCOME 41 45 93 110
OTHER INCOME (DEDUCTIONS)
Miscellaneous 1 1 3 1
Income taxes - 1 1 2
---- ---- ---- ----
1 2 4 3
---- ---- ---- ----
INTEREST CHARGES
Interest on long-term debt and 16 19 33 36
other
Interest on short-term 2 1 3 2
borrowings
Allowance for borrowed funds
used during construction - (1) - (1)
---- ---- ---- ----
18 19 36 37
---- ---- ---- ----
NET INCOME 24 28 61 76
PREFERRED DIVIDEND REQUIREMENT - - 1 1
---- ---- ---- ----
INCOME AVAILABLE FOR COMMON $ 24 $ 28 $ 60 $ 75
STOCK
==== ==== ==== ====
</TABLE>
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS FOR THE
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
(Millions of Dollars)
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $306 $325 $270 $292
NET INCOME 24 28 61 76
MISCELLANEOUS - - - (1)
---- ---- ---- ----
330 353 331 367
---- ---- ---- ----
DIVIDENDS DECLARED
Common stock 16 17 16 30
Preferred stock - - 1 1
---- ---- ---- ----
16 17 17 31
---- ---- ---- ----
BALANCE AT END OF PERIOD $314 $336 $314 $336
==== ==== ==== ====
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
3
<PAGE>
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
(Unaudited)
June 30 December 31
1998 1997
(Millions of Dollars)
<S> <C> <C>
ASSETS
ELECTRIC UTILITY PLANT - ORIGINAL COST
Utility plant (includes Construction Work in
Progress of $34 and $27) $ 3,138 $ 3,078
Accumulated depreciation and amortization (1,319) (1,260)
------- -------
1,819 1,818
------- -------
OTHER PROPERTY AND INVESTMENTS
Contract termination receivable 99 104
Receivable from parent 101 106
Trojan decommissioning trust, at market 77 84
value
Corporate owned life insurance, less loans 64 58
of $27 and $30
Miscellaneous 17 17
------- -------
358 369
------- -------
CURRENT ASSETS
Cash and cash equivalents 13 3
Accounts and notes receivable 112 125
Unbilled and accrued revenues 29 46
Inventories, at average cost 31 30
Prepayments and other 27 21
------- -------
212 225
------- -------
DEFERRED CHARGES
Unamortized regulatory assets 794 819
Miscellaneous 21 25
------- -------
815 844
------- -------
$ 3,204 $ 3,256
======= =======
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock equity
Common stock, $3.75 par value per share,
100,000,000 shares authorized,
42,758,877 shares outstanding $ 160 $ 160
Other paid-in capital - net 480 480
Retained earnings 314 270
Cumulative preferred stock
Subject to mandatory redemption 30 30
Long-term obligations 1,023 1,008
------- -------
2,007 1,948
------- -------
CURRENT LIABILITIES
Accounts payable and other accruals 119 167
Accrued interest 11 11
Dividends payable 1 1
Accrued taxes 29 63
------- -------
160 242
------- -------
OTHER
Deferred income taxes 363 363
Deferred investment tax credits 41 43
Trojan decommissioning and transition costs 298 313
Unamortized regulatory liabilities 249 258
Miscellaneous 86 89
------- -------
1,037 1,066
------- -------
$ 3,204 $ 3,256
======= =======
<FN>
The accompanying notes are an integral part of
these consolidated balance sheets.
</FN>
</TABLE>
4
<PAGE>
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
1998 1997
(Millions of Dollars)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Reconciliation of net income to net cash provided by
(used in) operating activities
Net Income $ 62 $ 76
Non-cash items included in net income:
Depreciation and amortization 67 63
Amortization of Trojan investment 18 20
Amortization of deferred charges (7) 1
(credits)
Deferred income taxes - net - (3)
Changes in working capital:
(Increase) Decrease in receivables 30 33
(Increase) Decrease in inventories (2) (2)
Increase (Decrease) in payables and (82) (20)
accrued taxes
Other working capital items - net (6) 2
Other - net 8 1
----- ----
NET CASH PROVIDED BY (USED IN) OPERATING 88 171
ACTIVITIES
----- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures & energy efficiency (68) (77)
programs
Trojan decommissioning expenditures (13) (6)
Trojan decommissioning trust activity 9 (1)
Other - net - (7)
----- ----
NET CASH PROVIDED BY (USED IN) INVESTING (72) (91)
ACTIVITIES ----- ----
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term 38 19
borrowings
Borrowings from Corporate Owned Life (4) -
Insurance
Long-term obligations issued 142 -
Repayment of long-term obligations (164) (52)
Dividends paid (18) (47)
----- ----
NET CASH PROVIDED BY (USED IN) FINANCING (6) (80)
ACTIVITIES ----- ----
INCREASE (DECREASE) IN CASH AND CASH 10 -
EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3 19
----- ----
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13 $ 19
===== ====
- --------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow
information
Cash paid during the period:
Interest, net of amounts capitalized $ 33 $ 36
Income taxes 78 73
- --------------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
5
<PAGE>
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - PRINCIPLES OF INTERIM STATEMENTS
The interim financial statements have been prepared by Portland General
Electric Company (PGE) and, in the opinion of management, reflect all material
adjustments which are necessary to a fair statement of results for the interim
period presented. Certain information and footnote disclosures made in the
last annual report on Form 10-K have been condensed or omitted for the interim
statements. Certain costs are estimated for the full year and allocated to
interim periods based on the estimates of operating time expired, benefit
received or activity associated with the interim period. Accordingly, such
costs are subject to year-end adjustment. It is PGE's opinion that, when the
interim statements are read in conjunction with the 1997 Annual Report on
Form 10-K, the disclosures are adequate to make the information presented not
misleading.
RECLASSIFICATIONS - Certain amounts in prior years have been reclassified for
comparative purposes.
NOTE 2 - LEGAL MATTERS
TROJAN INVESTMENT RECOVERY - On June 24, 1998, the Oregon Court of Appeals
ruled that the Oregon Public Utility Commission (OPUC) does not have the
authority to allow Portland General Electric (PGE) to recover a return on its
undepreciated investment in the Trojan generating facility. The court upheld
the OPUC's authorization of PGE's recovery of its undepreciated investment in
Trojan.
The Court of Appeals decision was a result of combined appeals from earlier
circuit court rulings. In April 1996, a Marion County Circuit Court judge
ruled that the OPUC could not authorize PGE to collect a return on its
undepreciated investment in Trojan, contradicting a November 1994 ruling from
the same court upholding the OPUC's authority. The 1996 ruling was the result
of an appeal of PGE's 1995 general rate order which granted PGE recovery of,
and a return on, 87 percent of its remaining investment in Trojan.
Both the Company and OPUC plan to file petitions for review with the Oregon
Supreme Court. The Company cannot predict the outcome of the appeal.
Additionally, due to uncertainties in the regulatory process, management cannot
predict, with certainty, what ultimate rate making action the OPUC will take
regarding PGE's recovery of a rate of return on its Trojan investment.
At June 30, 1998, PGE's after-tax Trojan plant investment was $179 million.
PGE is presently collecting annual revenues of approximately $23 million which
represent a return on its undepreciated investment. Revenue amounts allowed to
recover a return on the Trojan investment decline through the recovery period
which ends in the year 2011.
Management believes that the ultimate outcome will not have a material adverse
impact on the financial condition of the Company. However, it may have a
material impact on the results of operations for a future reporting period.
OTHER LEGAL MATTERS - PGE is party to various other claims, legal actions and
complaints arising in the ordinary course of business. These claims are not
considered material.
6
<PAGE>
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following review of Portland General Electric Company's (PGE) results of
operations should be read in conjunction with the Consolidated Financial
Statements.
Due to seasonal fluctuations in electricity sales, as well as the price of
wholesale energy and fuel costs, quarterly operating earnings are not
necessarily indicative of results to be expected for calendar year 1998.
PGE does not have a fuel adjustment clause as part of its retail rate
structure; therefore, changes in fuel and purchased power expenses are
reflected currently in earnings.
1998 COMPARED TO 1997 FOR THE THREE MONTHS ENDED JUNE 30
PGE earned $24 million during the second quarter of 1998 compared to earnings
of $28 million in 1997. Reduced earnings were the result of lower margins on
sales of electricity.
Revenues declined $47 million compared to the second quarter 1997 due to the
transfer of wholesale trading activities to a non-regulated affiliate. Retail
revenues increased 2.7%. The number of retail customers increased by 17,000
since the second quarter of 1997.
MEGAWATT-HOURS SOLD (THOUSANDS)
1998 1997
Retail 4,243 4,171
Wholesale 2,382 6,958
Energy purchases declined by 53 percent due to the decline in wholesale
activity, contributing to a $39 million reduction in power costs. Firm and
spot market prices both increased compared to 1997. Overall, purchased
power prices increased to an average 14.1 mills compared to 12.2 mills for
the 1997 period. As a result of rising purchased power prices, PGE
generation increased 72 percent or almost 800 thousand MWh, representing
29 percent of PGE's total power needs.
<TABLE>
<CAPTION>
MEGAWATT/VARIABLE POWER COSTS
Megawatt-Hours Average Variable
(thousands) Power Cost (Mills/kWh)
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Generation 1,880 1,093 6.6 4.4
Firm Purchases 4,347 9,410 14.3 12.3
Spot Purchases 482 930 12.4 10.7
----- ------ ---- ----
Total Send-Out 6,709 11,433 *13.2 *12.1
===== ====== ==== ====
<FN>
(*includes wheeling costs)
</FN>
</TABLE>
7
<PAGE>
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating expenses (excluding variable power, depreciation and
income taxes) were comparable to 1997 level.
1998 COMPARED TO 1997 FOR THE SIX MONTHS ENDED JUNE 30
PGE earned $60 million during the six months ended June 30, 1998
compared to earnings of $75 million in 1997. Reduced earnings were
the result of lower margins on sales of electricity and higher
operating costs.
Revenues declined $101 million compared to the first half of 1997,
primarily due to the transfer of wholesale trading activities to a
non-regulated affiliate. Wholesale revenues declined by $110 from
1997. Retail revenues for the first half of 1998 increased
slightly. Additional revenues from the residential sector were
mostly offset by a decline in revenues from industrial and
commercial customers. Megawatt-hours sold to retail customers were
flat when compared to the 1997 period. Additional sales resulting
from an increase in the number of retail customers was offset by
warmer temperatures which reduced the average use per customer.
MEGAWATT-HOURS SOLD (THOUSANDS)
1998 1997
Retail 8,969 9,006
Wholesale 5,957 13,377
Lower wholesale sales activity contributed to a significant
decline in energy purchases and a $73 million reduction in
power costs. Average prices for energy have increased when
compared to the 1997 period. As a result of rising purchase
power prices, PGE increased its generation by 65% or almost
1.8 million MWH. Company generation provided 28% of total
power needs
<TABLE>
<CAPTION>
MEGAWATT/VARIABLE POWER COSTS
Megawatt-Hours Average Variable
(thousands) Power Cost (Mills/kWh)
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Generation 4,423 2,677 6.8 4.3
Firm Purchases 9,996 18,703 15.4 14.3
Spot Purchases 858 1,622 13.2 11.3
------ ------ ---- ----
Total Send-Out 15,277 23,002 *13.9 *13.4
====== ====== ==== ====
<FN>
(*includes wheeling costs)
</FN>
</TABLE>
8
<PAGE>
PORTLAND GENERAL ELECTRIC COMPANY AND
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating expenses (excluding variable power, depreciation and
income taxes) increased $11 million due to the January ice
storm repair costs and higher administrative expenses.
Depreciation expenses resulting from normal asset additions
(primarily distribution assets) were more than offset by
amortization credits associated with benefits resulting from
the termination of a power sales agreement and the Enron
merger agreement.
CASH FLOW
CASH PROVIDED BY OPERATIONS is used to meet the day-to-day
cash requirements of PGE. Supplemental cash is obtained from
external borrowings, as needed.
A significant portion of cash from operations comes from
depreciation and amortization of utility plant, charges which
are recovered in customer revenues but require no current cash
outlay. Changes in accounts receivable and accounts payable
can also be significant contributors or users of cash.
Decreased cash flow was primarily due to higher tax related
payments and a significant reduction in accounts payable.
INVESTING ACTIVITIES include improvements to generation,
transmission and distribution facilities and continued
investment in energy efficiency programs. Through June 30,
1998, $68 million has been expended for capital projects,
primarily improvements to PGE's distribution system to support
the addition of new customers to PGE's service territory.
PGE deposits funds into an external trust for Trojan
decommissioning costs. Funds are collected from customers at
a rate of $14 million annually. The trust invests in
investment-grade tax-exempt and U.S. Treasury bonds.
Withdrawals from the trust are made as necessary for
reimbursement of decommissioning expenditures.
FINANCING ACTIVITIES - PGE has relied on commercial paper
borrowings and cash from operations to manage its day to day
financing requirements. In June 1998, PGE redeemed $142
million of its variable rate pollution control bonds and in
turn issued fixed rate bonds maturing through 2033.
The issuance of additional First Mortgage Bonds and preferred
stock requires PGE to meet earnings coverage and security
provisions set forth in the Articles of Incorporation and the
Indenture securing its First Mortgage Bonds. As of June 30,
1998 PGE has the capability to issue preferred stock and
additional First Mortgage Bonds in amounts sufficient to meet
its capital requirements.
9
<PAGE>
PORTLAND GENERAL ELECTRIC COMPANY AND
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL AND OPERATING OUTLOOK
CUSTOMER CHOICE
PROPOSAL
In late 1997 PGE filed a proposal before the OPUC which would
give all of its customers a choice of electricity providers as
early as first quarter 1999. If the proposal is approved, PGE
would become a regulated transmission and distribution company
focused on delivering, but not selling, electricity. As part
of this restructuring PGE is asking for OPUC approval to sell
all its generating assets, power supply and purchase
contracts. A sale of PGE's supply portfolio would allow the
OPUC to put a dollar value on "transition costs", the costs
that a regulated utility company would be unable to recover in
a competitive market. PGE is seeking full recovery of these
transition costs.
In July 1998, the OPUC staff issued its position, disagreeing
with PGE's proposal for full customer choice. The OPUC staff
instead recommends a "portfolio model" over PGE's plan and
also rejects PGE's request to sell hydroelectric assets.
Under the OPUC staff proposal, residential and small business
customers would make choices from a portfolio program offered
by PGE while industrial customers would choose their
electricity provider through direct access. PGE will file its
response to OPUC staff and intervenor testimony in mid to late
August 1998.
INTRODUCTORY PROGRAM
PGE initiated the Customer Choice Introductory Program to
allow over 50,000 PGE customers in four cities to buy their
power from competing energy service providers. As of June 30,
1998, over 8,700 or almost 17 percent of eligible retail
customers had selected alternate energy service providers.
There are fourteen certified energy service providers, with
eight currently scheduling and selling power. This program,
which terminates on December 31, 1998, is providing valuable
information to PGE, the OPUC and legislators on the effects of
retail competition on PGE and its customers. PGE does not
expect that this program will have a material adverse impact
on 1998 operating margins. PGE plans to resume service to
those customers who switched to an alternate energy provider
during the introductory program.
RETAIL CUSTOMER GROWTH AND ENERGY SALES
Weather adjusted retail energy sales grew by 2.1 percent for
the six months ended June 30, 1998 compared to the same period
last year. PGE expects 1998 retail energy sales growth of
approximately 2.2 percent over 1997. Sales growth has slowed
in the manufacturing sector as sales to high-tech customers
return to average growth rates (from above average sales
growth experienced in the last two years).
QUARTERLY INCREASE IN RETAIL CUSTOMERS
QUARTER/YEAR RESIDENTIAL COMMERCIAL/INDUSTRIAL
1Q 96 3,633 539
2Q 96 3,664 76
3Q 96 3,021 594
4Q 96 5,151 877
1Q 97 3,953 509
2Q 97 4,693 537
3Q 97 3,529 388
4Q 97 3,698 12
1Q 98 2,762 670
2Q 98 4,710 603
10
<PAGE>
PORTLAND GENERAL ELECTRIC COMPANY AND
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESIDENTIAL EXCHANGE PROGRAM - In early 1998 rates for PGE's
residential and small farm customers increased 11.9 percent
due to the Bonneville Power Administration's (BPA) elimination
of the Residential Exchange Credit. PGE contested this
decision and has recently come to an agreement with BPA which
will allow PGE customers access to federal power in a manner
comparable to the access provided public power customers.
Under the agreement (presently being reviewed by BPA and other
third partners), BPA will also pay PGE $25.5 million which
will be used to reduce the retail rates of PGE's residential
and small farm customers over the next few years.
POWER SUPPLY
Hydro conditions in the region are below normal. Current
projections forecast the January-to-July runoff to be 94
percent of normal, assuming normal precipitation for the rest
of the run-off season, compared to 150 percent of normal last
year. Efforts to restore salmon has reduced the amount of
water available for generation which, if continued, may mean
less water available in the fall and winter for generation
when demand for electricity in the Pacific Northwest is
highest.
PGE's base of hydro and thermal generating capacity and the
surplus of electric generating capability in the Western U.S.
provides PGE the flexibility needed to respond to seasonal
fluctuations in the demand for electricity both within its
service territory and from its wholesale customers.
WHOLESALE MARKETING
Wholesale sales declined dramatically in the first half of
1998 due to the transfer of PGE's long-term wholesale
marketing activities to its non-regulated affiliates. PGE is
participating in the wholesale marketplace to balance its
supply of power to meet the needs of its retail customers,
manage risk and to administer PGE's current long-term
wholesale contracts.
TROJAN INVESTMENT RECOVERY
On June 24, 1998, the Oregon Court of Appeals ruled that the
Oregon Public Utility Commission (OPUC) does not have the
authority to allow Portland General Electric (PGE) to recover
a return on its undepreciated investment in the Trojan
generating facility. The court upheld the OPUC's
authorization of PGE's recovery of the undepreciated balance
of its investment in Trojan.
The Court of Appeals decision was a result of combined appeals
from earlier circuit court rulings. In April 1996, a Marion
County Circuit Court judge ruled that the OPUC could not
authorize PGE to collect a return on its undepreciated
investment in Trojan, contradicting a November 1994 ruling
from the same court upholding the OPUC's authority. The 1996
ruling was the result of an appeal of PGE's 1995 general rate
order which granted PGE recovery of, and a return on, 87
percent of its remaining investment in Trojan.
Both the Company and OPUC plan to file petitions for review
with the Oregon Supreme Court.
11
<PAGE>
PORTLAND GENERAL ELECTRIC COMPANY AND
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For further information, regarding the legal challenges to the
OPUC's authority to grant recovery for PGE's Trojan investment
see Part II, Other Information, Item 1. - Legal Proceedings.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 established standards requiring
that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its
fair value. The new standard requires that changes in the
derivative's value be recognized currently in earnings unless
specific hedge accounting criteria are met. SFAS No. 133 is
to be effective in 1999. PGE has not yet quantified the
impacts of adopting SFAS No. 133 or determined the timing of
adoption.
YEAR 2000
The Year 2000 problem results from the use in computer
hardware and software of two digits rather than four digits to
define the applicable year. The use of two digits was a
common practice for decades when computer storage and
processing was much more expensive than today. When computer
systems must process dates both before and after January 1,
2000, two-digit year "fields" may create processing
ambiguities that can cause errors and system failures. For
example, computer programs that have date-sensitive features
may recognize a date represented by "00" as the year 1900,
instead of 2000. These errors or failures may have limited
effects, or the effects may be widespread, depending on the
computer chip, system or software, and its location and
function. The effects of the Year 2000 problem are
exacerbated because of the interdependence of computer and
telecommunications systems in the United States and throughout
the world. This interdependence certainly is true for PGE and
PGE's suppliers, trading partners, and customers.
PGE YEAR 2000 PLAN
PGE's Board of Directors has been briefed about the Year 2000
problem generally and as it may affect PGE business activity.
PGE is implementing a Year 2000 plan (the "Plan") covering all
of PGE's activities, which will be modified as events warrant.
Under the Plan, PGE has inventoried its computer hardware and
software systems and embedded chips and software; expects to
complete its assessment of the effects of Year 2000 problems
on its systems by September 1998; remedy those problems to the
maximum practicable extent by June 1999; verify and test the
systems to which remediation efforts have been applied; and
attempt to ameliorate those aspects of the Year 2000 problem
that cannot practicably be remediated by January 1, 2000,
including the development of contingency plans to cope with
the consequences of Year 2000 problems that have not been
identified or remediated by that date. PGE also has engaged
certain outside consultants, technicians and other external
resources to aid in formulating and implementing the Plan.
The Plan also recognizes that the computer,
telecommunications, and other systems ("Outside Systems") of
outside entities ("Outside Entities") play a major role in the
conduct of PGE's business. PGE does not have control of these
Outside Entities or Outside Systems. However, PGE's Plan
includes an ongoing process of contacting Outside Entities
whose systems have, or may have, a substantial effect on PGE's
ability to continue to conduct business without disruption
from
12
<PAGE>
PORTLAND GENERAL ELECTRIC COMPANY AND
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Year 2000 problems. The Plan envisions PGE's attempting
to assess the extent to which these Outside Systems may not be
"Year 2000 ready" or "Year 2000 compatible" (that is, able to
process data reliably both before and after January 1, 2000,
without disruption due to an inability reliably to process
date information). PGE will attempt diligently to coordinate
with these Outside Entities in an ongoing effort to obtain
assurance that these Outside Systems will be Year 2000
compatible well before January 1, 2000. Consequently, PGE
will work prudently with Outside Entities in a reasonable
attempt to assess, remediate, verify and test PGE's
connections to Outside Systems to ascertain the extent to
which they are, or can be made to be, Year 2000 ready and
compatible with PGE's remediation of its own systems. In that
regard, PGE is working with the North American Electric
Reliability Council (NERC) to coordinate Year 2000 efforts so
that electricity production and delivery systems maintain
reliability during the Year 2000 transition. The USDOE has
asked the NERC to assume a leadership role in preparing the
U.S. electric industry for the transition to the Year 2000.
To the extent that Outside Systems are not reasonably expected
to be Year 2000 ready, PGE intends to develop contingency
plans in an attempt to minimize the disruptions or other
adverse effects resulting from Year 2000 incompatibilities.
Although it is difficult to estimate the total costs of implementing
the Plan, through January 1, 2000 and
beyond, PGE's preliminary estimate is that such costs will not be material.
However, although management
believes that its estimates are reasonable, there can be no
assurance, for the reasons stated in the next paragraph, that
the actual costs of implementing the Plan will not differ
materially from the estimated costs. To date, PGE has expended
approximately $3 million since inception of the project in 1997.
OUTLOOK
From a forward-looking perspective, the extent and magnitude
of the Year 2000 Problem as it will affect PGE, both before
and for some period after January 1, 2000, are difficult to
predict or quantify for a number of reasons. Among the most
important are the difficulty of locating "embedded" chips that
may be in a great variety of hardware used for plant control,
environmental, transportation, access, communications and
other systems. PGE believes that it will be able to identify
and remediate mission-critical systems containing embedded
chips and will have contingency plans to deal with these
systems. Other important difficulties relate to the lack of
control over, and difficulty inventorying, assessing,
remediating, verifying and testing. Outside Systems
connected, and vital to PGE's computer, telecommunications or
other mission-critical systems; the difficulty of locating all
software (computer code) internal to PGE that is not Year 2000
compatible; and the unavailability of certain necessary
internal or external resources, including but not limited to
trained hardware and software engineers, technicians and other
personnel to perform adequate remediation, verification and
testing of PGE systems or Outside Systems. Year 2000 costs
are difficult to estimate accurately because of unanticipated
vendor delays, technical difficulties, the impact of tests of
Outside Systems and similar events. There can be no assurance
for example that all Outside Systems will be adequately
remediated so that they are Year 2000 ready by January 1,
2000, or by some earlier date, so as not to create a material
disruption to PGE's business. If, despite PGE's diligent,
prudent efforts under its Year 2000 Plan, there are Year 2000-
related failures that create substantial disruptions to PGE's
business, the adverse impact on PGE's business could be
material. Moreover, the estimated costs of implementing the
Plan do not take into account the costs, if any, that might be
incurred as a result of Year 2000-related failures that occur
despite PGE's implementation of the Plan.
13
<PAGE>
PORTLAND GENERAL ELECTRIC COMPANY AND
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward looking
statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Although PGE believes that its expectations are based
on reasonable assumptions, it can give no assurance that its
goals will be achieved. Important factors that could cause
actual results to differ materially from those in the forward
looking statements herein include, but are not limited to,
political developments affecting federal and state regulatory
agencies, the pace of electric industry deregulation in Oregon
and in the United States, environmental regulations, changes
in the cost of power, adverse weather conditions, and the
effects of the Year 2000 date change during the periods
covered by the forward looking statements.
14
<PAGE>
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For further information, see PGE's report on Form 10-K for the
year ended December 31, 1997.
CITIZENS' UTILITY BOARD OF OREGON V. PUBLIC UTILITY COMMISSION
OF OREGON and UTILITY REFORM PROJECT, COLLEEN O'NEILL AND
LLOYD MARBET V. OREGON PUBLIC UTILITY COMMISSION, the Court of
Appeals of the State of Oregon.
On June 24, 1998, the Court of Appeals of the State of Oregon
ruled that the Oregon Public Utility Commission (OPUC) does
not have the authority to allow Portland General Electric
(PGE) to recover a rate of return on its undepreciated
investment in the Trojan generating facility. The court
upheld the OPUC's authorization of PGE's recovery of its
investment in Trojan.
In April 1996, a circuit court judge in Marion County, Oregon
ruled against the OPUC, contradicting a November 1994 ruling
from the same court upholding the OPUC's authority. These
decisions were appealed to the Court of Appeals.
PGE's after-tax Trojan investment at June 30, 1998 is $179
million. PGE is presently collecting annual revenues of
approximately $23 million which represent a return on its
undepreciated investment. Revenue amounts allowed for
recovery of a return on the Trojan investment decline through
the recovery period which ends in the year 2011.
Management believes that the ultimate outcome will not have a
material adverse impact on the financial condition of the
Company. However, it may have a material impact on the
results of operations for a future reporting period.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
NUMBER EXHIBIT
27 Financial Data Schedule - UT
(Electronic Filing Only)
b. Reports on Form 8-K
June 24, 1998 - Item 5. Other Events: Legal Matters, Trojan Recovery.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrants have duly caused this report to be
signed on their behalf by the undersigned hereunto duly
authorized.
PORTLAND GENERAL ELECTRIC COMPANY
(Registrants)
August 14, 1998 By /S/ ALVIN ALEXANDERSON
Alvin Alexanderson
Senior Vice President
General Counsel and Secretary
August 14, 1998 By /S/ MARY K. TURINA
Mary K. Turina
Controller
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE>UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED
FROM THE CONSOLIDATED FINANCIAL STATEMENTS FILED ON FORM
10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 1998 FOR PORTLAND
GENERAL
ELECTRIC (PGE) AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER>1,000,000
<CIK>0000784977
<NAME>PORTLAND-GENERAL-ELECTRIC
<CAPTION>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,819
<OTHER-PROPERTY-AND-INVEST> 358
<TOTAL-CURRENT-ASSETS> 212
<TOTAL-DEFERRED-CHARGES> 815
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 3,204
<COMMON> 160
<CAPITAL-SURPLUS-PAID-IN> 480
<RETAINED-EARNINGS> 314
<TOTAL-COMMON-STOCKHOLDERS-EQ> 954
30
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<LONG-TERM-DEBT-NET> 1,018
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0
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<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,197
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<GROSS-OPERATING-REVENUE> 574
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<OTHER-OPERATING-EXPENSES> 438
<TOTAL-OPERATING-EXPENSES> 481
<OPERATING-INCOME-LOSS> 93
<OTHER-INCOME-NET> 4
<INCOME-BEFORE-INTEREST-EXPEN> 97
<TOTAL-INTEREST-EXPENSE> 36
<NET-INCOME> 61
1
<EARNINGS-AVAILABLE-FOR-COMM> 60
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<F1>Represents the 12 month-to-date figure ending June 30, 1998.
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