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 SEPTEMBER 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 October 31, 1998: 42,758,877 shares of Common Stock,
$3.75 par value. (All shares are owned by Enron Corp.)
1
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............ 8
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings.................................. 19
Item 6 - Exhibits and Reports on Form 8-K................... 19
Signature Page.............................................. 20
DEFINITIONS
kWh...............................................................Kilowatt-Hour
Mill......................................................One tenth of one cent
MWh...............................................................Megawatt-hour
OPUC or the Commission.........................Oregon Public Utility Commission
PGE or the Company............................Portland General Electric Company
Trojan.....................................................Trojan Nuclear Plant
2
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME FOR THE
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
(Millions of Dollars)
OPERATING REVENUE $ 274 $ 391 $ 848 $ 1,066
OPERATING EXPENSES
Purchased power and fuel 101 223 313 508
Production and distribution 32 31 100 94
Administrative and other 29 26 84 76
Depreciation and amortization 40 37 113 115
Taxes other than income taxes 14 14 44 42
Income taxes 17 14 60 74
----- ----- ----- -------
233 345 714 909
----- ----- ----- -------
NET OPERATING INCOME 41 46 134 157
----- ----- ----- -------
OTHER INCOME (DEDUCTIONS)
Other 2 (24) 5 (23)
Income taxes 1 11 3 12
----- ----- ----- -------
3 (13) 8 (11)
----- ----- ----- -------
INTEREST CHARGES
Interest on long-term debt and
other 17 17 50 52
Interest on short-term borrowing 2 1 5 4
Allowance for borrowed funds used
during construction (1) - (1) (1)
----- ----- ----- -------
18 18 54 55
----- ----- ----- -------
NET INCOME 26 15 88 91
PREFERRED DIVIDEND REQUIREMENT 1 1 2 2
----- ----- ----- -------
INCOME AVAILABLE FOR COMMON STOCK $ 25 $ 14 $ 86 $ 89
===== ===== ===== =======
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS FOR THE
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
(Millions of Dollars)
BALANCE AT BEGINNING OF PERIOD $ 314 $ 336 $ 270 $ 292
NET INCOME 26 15 88 91
ESOP TAX BENEFIT AND OTHER - (1) - (2)
----- ----- ----- -------
340 350 358 381
----- ----- ----- -------
DIVIDENDS DECLARED
Common stock - cash 16 16 33 46
Common stock - property - 97 - 97
Preferred stock 1 1 2 2
----- ----- ----- -------
17 114 35 145
----- ----- ----- -------
BALANCE AT END OF PERIOD $ 323 $ 236 $ 323 $ 236
===== ===== ===== =======
The accompanying notes are an integral part of these consolidated statements.
3
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(Unaudited)
September 30 December 31
1998 1997
(Millions of Dollars)
ASSETS
ELECTRIC UTILITY PLANT - ORIGINAL COST
Utility plant (includes Construction Work in
Progress of $31 and $27) $ 3,167 $ 3,078
Accumulated depreciation (1,350) (1,260)
------- -------
1,817 1,818
------- -------
OTHER PROPERTY AND INVESTMENTS
Contract termination receivable 97 104
Receivable from parent 99 106
Trojan decommissioning trust, at market value 76 84
Corporate owned life insurance, less loans of
$0 and $30 92 58
Other investments 16 17
------- -------
380 369
------- -------
CURRENT ASSETS
Cash and cash equivalents 28 3
Accounts and notes receivable 108 125
Unbilled and accrued revenues 33 46
Inventories, at average cost 28 30
Prepayments and other 40 21
------- -------
237 225
------- -------
DEFERRED CHARGES
Unamortized regulatory assets 756 819
Miscellaneous 18 25
------- -------
774 844
------- -------
$ 3,208 $ 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 323 270
Cumulative preferred stock
Subject to mandatory redemption 30 30
Long-term debt 990 1,008
------- ------
1,983 1,948
------- ------
CURRENT LIABILITIES
Accounts payable and other accruals 129 167
Accrued interest 14 11
Dividends payable 17 1
Accrued taxes 38 63
------- ------
198 242
OTHER
Deferred income taxes 363 363
Deferred investment tax credits 40 43
Unamortized regulatory liabilities 249 258
Trojan decommissioning and transition costs 289 313
Miscellaneous 86 89
------- ------
1,027 1,066
------- ------
$ 3,208 $ 3,256
======= =======
The accompanying notes are an integral part of these consolidated balance
sheets.
4
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
Nine Months Ended
September 30
1998 1997
(Millions of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Reconciliation of net income to net cash
provided by (used in) operating activities
Net Income $ 88 $ 91
Depreciation and amortization 113 125
Deferred income taxes - (57)
Other non-cash expenses - 24
(Increase) Decrease in receivables 30 12
Increase (Decrease) in payables (59) 85
Other working capital items - net (10) (8)
Other - net 44 6
------ -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 206 278
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (96) (120)
Other - net (10) (9)
------ -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (106) (129)
------ -------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayment of long-term debt (211) (98)
Issuance of long-term debt 185 22
Dividends paid (18) (65)
Other - net (31) -
------ -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (75) (141)
------ -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 25 8
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3 19
------ -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 28 $ 27
====== =======
Supplemental disclosures of cash flow information
Cash paid during the period:
Interest, net of amounts capitalized $ 45 $ 52
Income taxes 109 73
The accompanying notes are an integral part of these consolidated statements.
5
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 PGE and, in the opinion
of management, reflect all material adjustments which are necessary for 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 to
conform to current year presentation.
NOTE 2 - LEGAL MATTERS
TROJAN INVESTMENT RECOVERY - On June 24, 1998, the Oregon Court of Appeals
ruled that the OPUC does not have the authority to allow 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.
On August 26, 1998, PGE and the OPUC filed a Petition for Review with the
Oregon Supreme Court, supported by amicus briefs filed by three other major
utilities seeking review of that portion of the Oregon Court of Appeals
decision relating to PGE's return on its undepreciated investment in Trojan.
If the Supreme Court declines to hear the case, it would be referred back to
the OPUC. 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.
Also on August 26, 1998, the Utility Reform Project filed a Petition for Review
with the Oregon Supreme Court seeking review of that portion of the Oregon
Court of Appeals decision relating to PGE's recovery of its undepreciated
investment in Trojan.
At September 30, 1998, PGE's after-tax Trojan plant investment was $174
million. PGE is presently collecting annual revenues of approximately $23
million which represent a return on its undepreciated investment. Revenue
amounts reflecting a recovery of a return on the Trojan investment decline
through the recovery period which ends in the year 2011.
6
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
7
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 PGE's results of operations should be read in
conjunction with the 1997 Annual Report on Form 10K.
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 SEPTEMBER 30
PGE earned $25 million during the third quarter of 1998 compared to $14 million
in 1997. Increased earnings were largely attributable to a $14 million after-
tax non-recurring loss provision for future costs associated with non-utility
property, recorded in 1997.
Total revenues declined $117 million compared to the third quarter of 1997 due
to the transfer of wholesale trading activities to a non-regulated affiliate.
Retail revenues, adjusted for the accounting effect of BPA payments received
under the Exchange Provisions of the Regional Power Act (fully offset in
"Purchased Power and Fuel") increased 1.4% The average number of retail
customers increased by approximately 16,000 since the third quarter of 1997.
MEGAWATT-HOURS SOLD (THOUSANDS)
1998 1997
Retail 4,389 4,364
Wholesale 2,675 8,665
Energy purchases declined by 63 percent due to the decline in wholesale
activity, contributing to a $122 million reduction in power costs. Firm
prices decreased slightly and spot market prices increased compared to
1997, due primarily to regional hydro conditions and gas prices. Overall,
purchased power prices increased to an average 21.1 mills compared to 18.6
mills for the 1997 period. Generation increased 34 percent as plants
operated to produce power more economically than the cost to purchase.
Total generation increased from 2.3 million MWh in 1997 to 3.1 million MWh
in 1998, and accounted for 43% of total Company energy, up from 17%.
MEGAWATT/VARIABLE POWER COSTS
Megawatt-Hours Average Variable
1998 1997 1998 1997
Generation 3,060 2,288 9.6 9.1
Firm Purchases 3,359 10,113 18.8 19.1
Spot Purchases 723 907 32.1 12.9
----- ------ ----- -----
Total Send-Out 7,142 13,308 Average *17.3 *17.7
(*includes wheeling costs)
8
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 levels.
Other Income (Deductions) for 1997 reflects a loss provision recorded for future
demolition and removal costs associated with non-utility property.
1998 COMPARED TO 1997 FOR THE NINE MONTHS ENDED SEPTEMBER 30
PGE earned $86 million during the nine months ended September 30, 1998,
compared to earnings of $89 million in 1997. Reduced earnings were the result
of lower margins on sales of electricity and higher operating costs. In
addition, the 1997 period included the $14 million after tax non-recurring
loss provision for future costs associated with non-utility property.
Revenues declined $218 million compared to the first nine months of 1997, due
almost entirely to the transfer of wholesale trading activities to a
non-regulated affiliate. Retail revenues declined slightly as additional sales
to the residential sector were offse 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 were offset by warmer temperatures in the
first quarter of the year, reducing the average use per customer.
MEGAWATT-HOURS SOLD (THOUSANDS)
1998 1997
Retail 13,358 13,370
Wholesale 8,632 22,043
Lower wholesale sales activity contributed to a significant decline in energy
purchases and a $195 million reduction in power costs. Average prices for
energy have increased when compared to the 1997 period due to both regional
hydro conditions and gas prices. As a result of rising purchase power prices,
PGE increased its generation by 51%, or about 2.5 million MWh. Company
generation provided 33% of total power needs.
MEGAWATT/VARIABLE POWER COSTS
Megawatt-Hours Average Variable
(thousands) Power Cost (Mills/kWh)
1998 1997 1998 1997
Generation 7,483 4,965 8.0 5.3
Firm Purchases 13,355 28,815 16.3 16.0
Spot Purchases 1,582 2,529 21.8 11.9
Total Send-Out 22,420 36,311 Average *15.0 *15.0
(*includes wheeling costs)
9
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
MANAGMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating expenses (excluding variable power, depreciation and income taxes)
increased $16 million due to repair costs of the January ice storm and to higher
administrative expenses.
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. In addition, the 1997 period
includes a non-cash loss provision of $24 million related to future costs
associated with non-utility property ("Other non-cash expenses") and deferred
income taxes of $42 million on a capital gain associated with the termination of
the SCE Power Sales Agreement (in "Deferred income taxes").
INVESTING ACTIVITIES include improvements to generation, transmission and
distribution facilities and continued investment in energy efficiency programs.
Through September 30, 1998, $96 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 issued fixed rate bonds maturing through 2033 and in turn redeemed
$142 million of its variable rate pollution control bonds.
In September 1998, Moody's Investor Services reaffirmed PGE's debt ratings,
with secured debt rated A2, unsecured debt rated A3, and commercial paper rated
P1. These ratings should enable continued low borrowing costs.
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
September 30, 1998 PGE has the capability to issue preferred stock and
additional First Mortgage Bonds in amounts sufficient to meet its capital
requirements.
10
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 with the OPUC which would give all of its
customers a choice of electricity providers as early as 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 asked for OPUC approval to sell all its generating assets,
power supply and purchase contracts. The 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 costs.
In July 1998, the OPUC staff issued its position, disagreeing with PGE's
proposal for full customer choice. The OPUC staff instead recommended that
PGE continue to provide electricity and a regulated cost-of-service rate in
conjunction with a "portfolio model". OPUC Staff also rejected PGE's request
to sell hydroelectric assets. Under the OPUC staff proposal, all customers
would make choices from a portfolio program and a cost-of-service rate offered
by PGE while industrial customers would also be able to choose their electricity
provider through direct access. PGE filed its response to OPUC Staff and inter-
venor testimony in August, reaffirming its commitment to provide choice to all
of its customers and offering the idea of trust ownership of PGE's hydro-
electric assets.
As of September 30, 1998, the parties have been unable to resolve their differ-
ences and reach a settlement. The OPUC is scheduled to issue its restructuring
order in January 1999. OPUC Commissioners have indicated that they will likely
refer the issue of restructuring and their decision to the 1999 Oregon
Legislature.
INTRODUCTORY PROGRAM
PGE initiated the Customer Choice Introductory Program as a
one-year pilot to test deregulation readiness by allowing over
50,000 PGE customers in four cities to buy their power from
competing energy service providers. At its peak, over 8,700 -
almost 17 percent of eligible retail customers - had selected
from among eight participating energy service providers. All
participating customers will be returned to PGE by the
December 31, 1998 termination of the pilot program. PGE does
not expect that this program will have a material adverse
effect on 1998 operating margins.
The program has provided valuable information to PGE, the OPUC
and legislators on the effects of retail competition on PGE
and its customers. An independent assessment of the program
will be completed by year-end and made available to interested
parties, including the State Legislature.
11
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RETAIL CUSTOMER GROWTH AND ENERGY SALES
Weather adjusted retail energy sales grew by 2.7 percent for
the nine months ended September 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
2Q 96 3664 76
3Q 96 3021 594
4Q 96 5151 877
1Q 97 3953 509
2Q 97 4693 537
3Q 97 3529 388
4Q 97 3698 12
1Q 98 2762 670
2Q 98 4710 603
3Q 98 3822 671
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 had contested BPA's
1996 rate case decision that caused the increase and on
September 4, 1998 signed a "Residential Exchange Termination
Agreement" which provides for BPA payments to PGE totaling
$34.5 million over the next two years (through September
2000). The agreement further provides that such amount be
passed to residential and small farm customers in the form of
a tariff-based billing credit, which will reduce the previous
rate increase to approximately 5.7 percent for all eligible
customers through the middle of the year 2001.
POWER SUPPLY
Hydro conditions in the region during the year have been
slightly below normal, with the January-to-July runoff at 94
percent of normal; such runoff, however, was sufficient to
fill regional reservoirs. Projections of hydro conditions for
next year will not be available until near year end. Efforts
to restore salmon will continue to reduce the amount of water
available for generation under less than normal hydro
conditions.
PGE's base of hydro and thermal generating capacity and the
surplus of electric generating capability in the Western U.S.
provide PGE the flexibility needed to respond to seasonal
fluctuations in the demand for electricity both within its
service territory and from its wholesale customers.
On November 1, 1998, PGE signed a definitive agreement to sell
its 20 percent interest in coal-fired generating units 3 and 4
of the Colstrip power plant, located in eastern Montana. The
agreement, subject to both state and federal approval, would
transfer ownership of PGE's 322 megawatt interest in the plant
to PP&L Global, a subsidiary of PP&L Resources, for $230.5
million. Regulatory approval of this agreement is expected to
take about one year. It is not anticipated that the sale will
have an adverse impact on the results of operations.
WHOLESALE MARKETING
Wholesale sales declined from 1997 levels consistent with
PGE's plan to participate in the wholesale marketplace to
balance its supply of power to meet the needs of its retail
customers, manage risk, and administer its long-term wholesale
contracts.
12
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
TROJAN INVESTMENT RECOVERY
On June 24, 1998, the Oregon Court of Appeals ruled that the
OPUC does not have the authority to allow 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.
On August 26, 1998, PGE and the OPUC filed a Petition for
Review with the Oregon Supreme Court. If the Supreme Court
declines to hear the case, it would be referred back to the
Commission.
Also on August 26, 1998, the Utility Reform Project filed a
Petition for Review with the Oregon Supreme Court seeking
review of that portion of the Oregon Court of Appeals relating
to PGE's recovery of its undepreciated investment in Trojan.
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", to be effective January 1, 2000. 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. 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.
13
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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.
STATE OF READINESS
PGE's Board of Directors has adopted the Enron Corp Year 2000
plan (the "Plan"), which covers all of PGE's and other Enron
Corp subsidiaries' activities. The aim of the plan is to take
reasonable steps to prevent Enron's mission-critical functions from being
impaired due to the Year 2000 problem. "Mission-critical"
functions are those critical functions whose loss would cause
an immediate stoppage of or significant impairment to major
business areas (a major business area is one of material
importance to Enron's business).
PGE's Year 2000 plan has been assigned to a centralized staff
under the direction of a Year 2000 Project Manager, who coordinates
the implementation of the Plan within all affected areas of the
company. PGE has also engaged outside consultants, technicians and
other external resources to aid in implementing the Plan.
PGE is implementing the Plan, which will be modified as
events warrant. Under the Plan, PGE will continue to
inventory its mission-critical computer hardware and software
systems and embedded chips (computer chips with date-related
functions, contained in a wide variety of devices, assess the
effects of Year 2000 problems on the mission-critical
functions of PGE's business; remedy systems, software
and embedded chips in an effort to avoid material disruptions
or other material adverse effects on mission-critical
functions, processes and systems, verify and test the mission-
critical systems to which remediation efforts have been
applied; and attempt to mitigate those mission-critical
aspects of the Year 2000 problem that are not remediated by
January 1, 2000, including the development of contingency
plans to cope with the mission-critical consequences of Year
2000 problems that have not been identified or remediated by
that date.
The Plan recognizes that the computer, telecommunications, and
other systems ("Outside Systems") of outside entitities
("Outside Entities") have the potential for major, mission-
critical, adverse effects on the conduct of PGE's business.
PGE does not have control of these Outside Entities or Outside Systems.
However, the Plan includes an ongoing process of identifying
and contacting Outside Entities whose systems in PGE's judgment have,
or may have, a substantial effect on PGE's ability to continue to
conduct the mission-critical aspects of its business without
disruption from Year 2000 problems. The Plan envisions PGE's
attempting to inventory and assess the extent to which these
Outside Systems may not be "Year 2000 ready" or "Year 2000
compatible." PGE will attempt reasonably to coordinate with
these Outside Entities in an ongoing effort to obtain
assurance that the Outside Systems that are mission-critical
to PGE will be Year 2000 compatible well before January 1,
2000. Consequently, PGE will work prudently with Outside
Entities in a reasonable attempt to inventory, assess,
analyze, convert (where necessary), test, and develop
contingency plans for PGE's connections to these mission-
critical Outside Systems and to ascertain the extent to which
they are, or can be made to be, Year 2000 ready and compatible
with PGE's mission-critical systems.
It is important to recognize that the processes of
inventorying, assessing, analyzing, converting (where
necessary), testing, and developing contingency plans for
mission-critical items in anticipation of the Year 2000 event
are necessarily iterative processes. That is, the steps are
repeated as PGE learns more about the Year 2000 problem and
its effects on PGE's internal systems and on Outside Systems, and about the
14
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
effects that embedded chips may have on PGE's systems and Outside Systems.
As the steps are repeated, it is likely that new problems will be identified
and addressed. PGE anticipates that it will continue with these
processes through January 1, 2000 and, if necessary based on experience,
into the Year 2000 in order to assess and remediate problems
that reasonably can be identified only after the start of the
new century.
As of November 1998, PGE is at various stages in
implementation of the Plan, as shown in the following table,
which lists the status of both mission-critical internal
systems (including embedded chips) and Outside Systems. Any
notation of "complete" conveys the fact only that the initial
iteration of this phase has been substantially completed. PGE
will continue closely to monitor work under the Plan and to
revise estimated completion dates for the initial iteration of
each listed process.
YEAR 2000 READINESS PLAN
MISSION-CRITICAL INTERNAL ITEMS MISSION-CRITICAL OUTSIDE ENTITIES
STATUS COMPLETION DATE STATUS COMPLETION DATE
Inventory Complete December 1997 Complete October 1998
Assessment Complete October 1998 In Process November 1998
Analysis Complete October 1998 In Process November 1998
Conversion In Process June 1999 In Process June 1999
Testing In Process September 1999 To Be Initiated June 1999
Y2K-Ready In Process September 1999 To Be Initiated June 1999
Contingency Plan In Process June 1999 To Be Initiated June 1999
COSTS TO ADDRESS YEAR 2000 ISSUES
Under the Plan, PGE has not incurred material historical costs
for Year 2000 awareness, inventory, assessment, analysis,
conversion, testing, or contingency planning. Further, PGE
anticipates that its future costs for these purposes,
including those for implementing its Year 2000 contingency
plans, will not have a material adverse effect on the results of operations.
Although management believes that its estimates are
reasonable, there can be no assurance, for the reasons stated
in the "Outlook" section, below, that the actual costs of
implementing the plan will not differ materially from the
estimated costs or that PGE will not be materially adversely
affected by Year 2000 issues.
YEAR 2000 RISK FACTORS
REGULATORY REQUIREMENTS. PGE expects to satisfy all
requirements of regulatory authorities for achieving Year 2000
readiness. If its reasonable expectations in this regard are
in error, the adverse effect on PGE could be material.
Outside Entities could force temporary cessation of operations
that materially adversely affect PGE.
SHORTAGE OF RESOURCES. Between now and 2000 there will be
increased competition for people skilled in the technical and
managerial skills necessary to deal with the Year 2000
taking substantial precautions to recruit and retain sufficient
people skilled in dealing with the Year 2000 problem and has
hired consultants who bring additional skilled people to deal
with the Year 2000 problem as it
15
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
affects PGE, PGE could face shortages of skilled
personnel or other resources, such as Year 2000 ready computer
chips, and these shortages might delay or otherwise impair
PGE's ability to assure that its mission-critical systems are
Year 2000 ready. Outside Entities could force similar
problems that materially adversely affect PGE. PGE believes
that the possible import of the shortage of skilled people is
not, and will not be, unique to PGE.
POTENTIAL SHORTCOMING. PGE estimates that its mission-
critical systems, will be Year 2000-ready substantially before
January 1, 2000. However, there is no assurance that the Plan
will succeed in accomplishing its purposes or that unforeseen
circumstances will not arise during implementation of the Plan
that would materially and adversely affect PGE.
CASCADING EFFECT. PGE is taking reasonable steps to identify,
assess, and where appropriate, replace devices that contain
embedded chips. Despite these reasonable efforts, there is no
assurance that PGE will be able to find and remediate all
embedded chips in its systems. Further, there is no assurance that Outside
Entities on which PGE depends will be able to find and
remediate all embedded chips in their systems. Some of the
embedded chips that fail to operate or that produce anomalous
results may create system disruptions or failures. Some of
these disruptions or failures may spread from the systems in
which they are located to other systems in a cascade. These
cascading failures may have adverse effects upon PGE's ability
to maintain safe operations and may also have adverse effects
upon PGE's ability to serve its customers and otherwise to
fulfill certain contractual and other legal obligations. The
embedded chip problem is widely recognized as one of the more
difficult aspects of the Year 2000 problem across industries
and throughout the world. PGE believes that the possible
adverse impact of the embedded chip problem is not, and will
not be, unique to PGE.
THIRD PARTIES. PGE cannot assure that suppliers upon which it
depends for essential goods and services will convert and test
their mission-critical systems and processes in a timely
manner. Failure or delay by all or some of these entities,
including U.S. federal, state or local governments, could
create substantial disruptions having a material adverse
effect on PGE's business.
CONTINGENCY PLANS
As part of the Plan, PGE is developing contingency plans that
deal with two aspects of the Year 2000 problem: (1) that PGE,
despite its good-faith, reasonable efforts, may not have
satisfactorily remediated all of its internal mission-critical
systems; and (2) that Outside Systems may not be Year 2000
ready, despite PGE's good-faith, reasonable efforts to work
with Outside Entities. PGE's contingency plans are being
designed to minimize the disruptions or other adverse effects
resulting from Year 2000 incompatibilities regarding these
mission-critical functions or systems, and to facilitate the
early identification and remediation of mission-critical Year
2000 problems that first manifest themselves after January 1,
2000.
PGE's contingency plans will contemplate an assessment of all
its mission-critical internal information technology systems
and its internal operational systems that use computer-based
controls. This process will commence in the early minutes of
January 1, 2000, and continue for hours, days, or weeks as
circumstances require. Further, PGE will in that time frame
assess any mission-critical disruptions due to Year 2000-
related failures that are external to PGE. The assessment
process will cover, for example, loss of electrical power from
other utilities; telecommunications services from carriers; or
building access, security, or elevator service in facilities occupied
by PGE.
16
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PGE's contingency plans will include the creation of teams
that will be standing by on the eve of the new millennium,
prepared to respond rapidly and otherwise as necessary to
mission-critical Year 2000-related problems as soon as they
become known. The composition of teams that are assigned to
deal with Year 2000 problems will vary according to the
nature, mission-criticality, and location of the problem.
WORST CASE SCENARIO
The Securities and Exchange Commission requires that companies
must forecast the most reasonably likely worst case Year 2000
scenario, assuming that the company's Year 2000 plan is not
effective. Analysis of the most reasonably likely worst case
Year 2000 scenarios PGE may face leads to contemplation of the
following possibilities which, though unlikely in some or many
cases, must be included in any consideration of worst cases:
widespread failure of electrical, gas, and similar supplies by
utilities serving PGE; widespread disruption of the services
of communications common carriers; similar disruption to means
and modes of transportation for PGE and its employees,
contractors, suppliers, and customers; significant disruption
to PGE's ability to gain access to, and remain working in,
office buildings and other facilities; the failure of
substantial numbers of PGE's mission-critical information
(computer) hardware and software systems, including both
internal business systems and systems (such as those with
embedded chips) controlling operational facilities such as
electrical generation, transmission, and distribution systems;
and the failure of Outside Systems, the effects of which would
have a cumulative material adverse impact on PGE's mission-
critical systems. Among other things, PGE could face
substantial claims by customers or loss of revenues due to
service interruptions, inability to fulfill contractual
obligations, inability to account for certain revenues or
obligations or to bill customers accurately and on a timely
basis, and increased expenses associated with litigation,
stabilization of operations following mission-critical
failures, and the execution of contingency plans. PGE could
also experience an inability by customers, traders, and others
to pay, on a timely basis or at all, obligations owed to PGE.
Under these circumstances, the adverse effect on PGE, and the
diminution of PGE's revenues, would be material, although not
quantifiable at this time. Further in this scenario, the
cumulative effect of these failures could have a substantial
adverse effect on the economy, domestically and
internationally. The adverse effect on PGE, and the
diminution of its revenues, from a domestic or global
recession or depression also is likely to be material,
although not quantifiable at this time.
PGE will continue to monitor business conditions with the aim
of assessing and quantifying material adverse effects, if any,
that result from the Year 2000 problem.
SUMMARY
PGE has a Plan to deal with the Year 2000 challenge and
believes that it will be able to achieve substantial Year 2000
readiness with respect to the mission critical systems that it
controls. 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 these are: the difficulty of locating "embedded" chips
that may be in a great variety of mission-critical hardware
used for process or flow control, environmental,
transportation, access, communications and other systems; the
difficulty of inventorying, assessing, remediating, verifying
and testing Outside Systems; the difficulty in locating all
mission-critical 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. Accordingly, there can be no
17
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
assurance that all of PGE's systems and 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
reasonable efforts under the Plan, there are
mission-critical Year 2000-related failures that create
substantial disruptions to PGE's business, the adverse impact
on PGE's business could be material. Additionally, 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.
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.
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.
18
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 August 26, 1998, PGE and the OPUC filed a Petition for
Review with the Oregon Supreme Court, supported by amicus
briefs filed by three other major utilities seeking review of
that portion of the Oregon Court of Appeals decision relating
to PGE's return on its undepreciated investment in Trojan. If
the Supreme Court declines to hear the case, it would be
referred back to the OPUC.
Also on August 26, 1998, the Utility Reform Project filed a
Petition for Review with the Oregon Supreme Court seeking
review of that portion of the Oregon Court of Appeals decision
relating to PGE's recovery of its undepreciated investment in
Trojan.
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
None.
19
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)
November 12, 1998 By /s/ Bradley K. Alford
Bradley K. Alford
Vice President
Chief Financial Officer and
Treasurer
November 12, 1998 By /s/ Mary K. Turina
Mary K. Turina
Controller
Chief Accounting Officer
20
UT
1,000,000
0000784977
PORTLAND-GENERAL-ELECTRIC
9-MOS
DEC-31-1997
SEP-30-1998
PER-BOOK
1,817
380
237
774
0
3,208
160
480
323
963
30
0
986
0
0
0
0
0
2
2
1,225
3,208
848
60
654
714
134
8
142
54
88
2
86
0
60
206
0
0
Represents the 12 month-to-date figure ending September 30, 1998.
